Oil companies say price rises resulting from the American war with Iran could force the government to protect supplies for hospitals and essential services.
Britain faces a “significant shortfall of supply” in oil and gas within the next two months that would force ministers to “ration” supplies as long as the war in the Middle East continues, industry experts have warned.
The UK consumes approximately 1.4 million barrels of oil every day, of which only about half is produced domestically in the North Sea.
With a fifth of the world’s oil and gas stocks affected by the war in the Middle East, senior figures in the sector have warned that the UK will not be immune from a global supply shortage if the conflict continues.
Nick Butler, a former head of strategy at BP, warned that unless oil and gas began flowing through the Strait of Hormuz again within two or the three weeks then the situation would begin to get “serious”.
“At the moment the Strait of Hormuz is almost completely closed and therefore we’re losing something like 20 million barrels a day,” he told Times Radio. “That’s a fifth of global demand. If that goes on there’s going to be a real shortage of supply across the world and that includes the UK.
“The government will have to protect food supply, hospitals, schools, transport systems and what that means, that is effectively rationing. And then they will have to decide what to do with the rest of us who use oil every day, at home, in the car, and rationing will be necessary in some form and it’s not easy.
He added: “These are real hard choices and I don’t think the government’s made those choices yet, but I think it should be preparing people. Otherwise, what you’ll get if this goes on for another three or four weeks is panic buying.”
Experts at Lloyd’s List, the shipping analysts, said that even with military escorts in the Strait of Hormuz the best-case scenario would be “8 to 10 per cent of normal flows”.
Professor Paul de Leeuw, the director of the Energy Transition Institute at Robert Gordon University, said that while the vast majority of Britain’s imported oil came from the United States and Norway, the UK would still face shortages as tankers could be diverted to countries prepared to pay the highest prices.
He said: “The government will need to be thinking about a package of measures to conserve supply similar to that imposed by Germany in the wake of Russia’s invasion of Ukraine. We are not going to run out of oil, but we could have a period of time when we need to prioritise supply to protect and safeguard essential services and vulnerable communities.”
De Leeuw added that Britain was also vulnerable to international price fluctuations because it only had four refineries capable of turning oil into petroleum products, whereas in the 1970s it had 17.
Countries that primarily rely on the Gulf for oil and gas have already imposed some rationing to preserve supplies. Earlier this month Bangladesh imposed constraints on petrol and diesel sales and India has prioritised gas suppliers to households at the expense of industrial users.
Last week the investment bank JPMorgan Chase warned that they expected crude supply cuts to approach 12 million barrels per day, “making the deficit highly visible across physical markets.”
The government has detailed contingency plans to deal with disruptions in supply including powers to restrict the amount of fuel motorists can buy at petrol stations and limiting the hours they can operate. Fuel distributors can be directed to prioritise the delivery of bulk petrol to critical services such as emergency services and public transport.
Industry groups said there had been a spike in demand at some petrol stations as motorists sought to fill up before price rises. However, motoring groups insisted that the issue at present is a “price crisis, not a supply one”.
The price of Brent crude remained at about $100 a barrel on Monday, up 50 per cent month-on-month. Forecourt prices can lag up to about three weeks behind wholesale prices depending on the contract the operator has with suppliers. The RAC predicted that petrol would rise by another 3p in the next week to an average of 145p a litre and diesel by 9p to 170p.
Simon Williams, the RAC head of policy, said: “Drivers with diesel cars are really feeling the heat with the average price at the pump climbing above 161p a litre for the first time since early November 2023. Prices have shot up 19p a litre in just over two weeks, adding over £10 to the cost of a full tank. The average cost of filling up a 55-litre family car with diesel is now £88, whereas for petrol it’s £78.”
More immediate are concerns about the costs that road haulage businesses are facing. The wholesale cost of fuel is up 32 per cent since February 27, leading to fears that the prices of goods in supermarkets will increase. About 80 per cent of goods are transported by road in the UK.
There has also been a significant spike in the cost of jet fuel and experts now believe it is a case of when, not if, air fares increase. The price of jet fuel has almost doubled since the beginning of March, rising far faster than the cost of crude oil.
While many European airlines use hedging, locking in fuel for the coming months, airline bosses are increasingly worried about the impact on prices — and profits — if the war continues or escalates.
Air France-KLM has warned that roundtrip economy fares on long-haul flights could jump by about €50, while Wizz Air, the Hungarian airline, has warned the war risks wiping out its profits.
An industry source said: “Airlines can hedge all they like but any sustained rise in fuel prices will ultimately have an impact on ticket prices. The big question is how long the war will go on for, that is what will dictate the long term pain. But there’s also a risk to the chancellor and her plans as we know that air ticket prices can be a driver of inflation.”
