2nd September 2026
It is tempting to think of another rise in the oil price as simply another unwelcome addition to the cost of filling the car or heating the house. For many people, particularly in rural Scotland, that is already serious enough. But what is happening in the oil market could have consequences that reach much further into the economy.
The renewed conflict involving the United States and Iran has once again put the Strait of Hormuz at the centre of the world's attention. A significant proportion of the world's oil normally passes through this narrow stretch of water and any prolonged disruption creates an immediate risk of higher prices. Brent crude has moved sharply higher as markets have tried to price in that risk.
The important point is that oil does not have to remain at extremely high levels forever to cause economic problems. It simply has to remain high enough, and for long enough, to prevent inflation from falling as quickly as central banks would like.
That is where the story becomes much more complicated.
Britain has spent the past few years trying to get inflation back towards the Bank of England's 2% target. The process has been painfully slow. Interest rates have risen, households have faced higher mortgage costs and businesses have had to cope with more expensive borrowing. There was finally some hope that the worst was behind us and that interest rates could gradually come down.
An oil shock threatens that progress.
The reason is straightforward. Oil is not just petrol and diesel. It is built into almost everything that moves around the economy. Transport costs rise. Heating costs rise. Fishing becomes more expensive. Agriculture becomes more expensive. Construction costs are affected. Businesses using machinery or transporting goods face higher bills. Eventually some of those costs find their way into the prices paid by consumers.
For someone in Caithness who heats their home with heating oil, there is no need for an economist to explain the problem. The price is visible when the tank needs filled. There is no Ofgem price cap protecting heating-oil users in the way that electricity and gas customers have some protection.
The same applies to a fishing boat taking on fuel, a farmer filling machinery or a haulier facing another increase in diesel costs.
The difficulty for the Bank of England is that an economy experiencing another burst of energy inflation is not an economy in which it can comfortably cut interest rates.
And that brings us to something which receives far less attention in everyday political debate: the bond market.
Government borrowing costs have been rising around the world. Investors are demanding higher returns on government bonds because they are worried about inflation, the enormous amount of debt governments have accumulated and the prospect that interest rates will remain higher for longer.
Britain is particularly exposed because the Government is carrying debt of around £3 trillion.
That figure can sound frightening, but it is important not to misunderstand it. The Government does not suddenly have to pay the current market interest rate on the entire £3 trillion. Much of the debt was borrowed years ago at fixed rates and will continue to carry those rates until it matures.
But debt matures.
New borrowing also has to be issued.
And when old debt is refinanced or new money is borrowed, the Government has to deal with the interest rates available in the market at that time.
This means higher bond yields gradually work their way into the public finances.
It is rather like a household with a large collection of fixed-rate mortgages that come up for renewal at different times. If interest rates have risen substantially by the time each loan has to be renewed, the household does not suddenly see all its payments double. But over time the higher rates become increasingly painful.
That is broadly what happens to government debt.
It matters because the Chancellor is already facing a difficult Budget. Every additional pound spent servicing debt is a pound that cannot easily be spent somewhere else.
It cannot build a road.
It cannot fund a tax reduction.
It cannot support a business.
It cannot be spent on public services.
And this is where the oil price, interest rates and government finances start to form one story rather than three separate stories.
Higher oil prices can keep inflation higher.
Higher inflation makes the Bank of England more cautious about cutting rates.
Higher rates and inflation concerns can keep gilt yields elevated.
Higher gilt yields increase the cost of new government borrowing and refinancing.
That reduces the Chancellor's room for manoeuvre.
The problem does not stop there.
Businesses are also watching borrowing costs. A company deciding whether to build a new workshop, buy machinery, expand its premises or employ additional staff has to calculate whether the investment is worthwhile. If finance is expensive and future costs are uncertain, the safest decision may be to wait.
That is particularly unfortunate because Britain needs more investment, not less.
The latest economic forecasts may show some improvement in growth, but business investment remains a concern. An economy cannot become substantially more productive if businesses continually postpone the investment needed to make workers and companies more efficient.
This is one of the uncomfortable contradictions in the current economic debate.
Politicians want businesses to invest.
They want households to spend.
They want governments to build infrastructure.
They want wages to rise.
They want the economy to grow.
But they are trying to do all this while carrying historically high levels of debt and dealing with an energy system that remains vulnerable to events thousands of miles away.
There is no easy answer.
Governments can provide temporary support when energy prices surge, but that costs money. They can borrow more, but borrowing becomes more expensive when bond yields rise. They can raise taxes, but that can weaken household spending and business confidence.
There are no magic buttons.
That is why the current oil price deserves more attention than it is getting.
The biggest danger is not necessarily that Brent crude briefly touches another psychologically important level. Markets rise and fall. Wars eventually end. Supply chains adjust.
The danger is that policymakers begin with the assumption that the latest shock will be temporary and then discover several months later that it has become embedded in prices.
That would be particularly damaging for rural Britain.
The economic structure of Caithness and much of the Highlands is different from that of the major cities. Transport distances are longer. Alternative energy sources are not always readily available. Many businesses have little choice but to use vehicles, machinery and fuel. The cost of moving people and goods is a much bigger part of everyday business life.
An oil shock therefore has a disproportionate effect.
But there is a wider lesson here.
We often talk about the economy as though everything happens in separate boxes. Inflation is one issue. Government debt is another. Interest rates are another. Energy prices are another.
They are not separate.
They are connected.
A rise in the oil price can eventually affect the cost of government borrowing. A rise in government borrowing costs can affect investment. Lower investment can weaken economic growth. Weak growth can make it harder to reduce debt.
The danger is a vicious circle.
Britain does not necessarily face such a circle today. But the ingredients are visible.
That should make the Government rather less interested in short-term political slogans and rather more interested in economic resilience.
The country needs reliable energy, sensible long-term investment, productive businesses and public finances capable of absorbing shocks.
Because the next shock will come from somewhere.
It might be oil.
It might be another financial crisis.
It might be a trade dispute.
It might be something nobody has yet anticipated.
The question is whether Britain has enough economic room to deal with it when it arrives.
For households already worrying about heating bills and for small businesses already watching every penny, the oil price is an immediate problem.
For the Chancellor, it could become something much bigger.
It could become another reason why interest rates stay higher for longer, borrowing costs remain elevated and the Government discovers that its room to manoeuvre is rather smaller than it thought.
The oil shock may therefore be turning into a debt shock.
And that is a story which reaches a long way beyond the petrol station.