The Geopolitics of Energy: A Risk Premium for Britons

The latest increase in the energy price cap by Ofgem has dealt another blow to British consumers already struggling with rising costs. Behind this economic story lies a complex web of geopolitics that threatens to leave consumers paying a “risk premium” for their energy supply.

At the center of the US-Israel war on Iran is the Strait of Hormuz, which connects the Gulf to the ocean and carries approximately one-fifth of the world’s oil and liquefied natural gas (LNG). The closure of this strategic waterway would have catastrophic consequences for global energy markets. The UK’s decision to move away from Russian pipelines following the 2022 invasion of Ukraine has made British consumers increasingly reliant on imported energy, exposing them to international geopolitics.

Wholesale gas prices have risen by 11 percent over the past three months, affecting millions of households in England, Scotland, and Wales. While 35 percent of households are currently on fixed-rate energy plans that won’t be immediately impacted, most will face higher bills this winter, adding to their already considerable financial burdens.

The Centre for Economics and Business Research predicts a dismal picture: by the end of 2027, the average UK household’s real spending power will be reduced by £2,400. This economic issue has profound social implications as well, particularly for small business owners who are struggling to absorb rising energy costs. As one entrepreneur from northeast London noted, “It’s getting more and more difficult to absorb the rises. Ultimately, the customer is also suffering, leading to less disposable income, meaning less spending.”

The UK government has introduced a tax cut on monthly electricity bills in an effort to shield people from the economic impacts of the Iran war. However, this measure doesn’t address the fundamental issue: the reliance on imported energy and the associated “risk premium” that consumers are paying.

As long as the UK relies on energy imports, it will continue to be impacted by geopolitics. The US attacks on Iran threaten continued destabilization in the Gulf region, making it difficult to predict when or if prices will stabilize. Diplomatic efforts have failed to keep the Strait of Hormuz open for prolonged periods, leading to a new reality: volatility is not a temporary concern; it’s here to stay.

Ofgem’s price cap increase is just another chapter in the ongoing energy crisis stemming from the war. Experts note that the situation doesn’t look any clearer, and it remains uncertain when prices will stabilize. The consumer will continue to pay a “risk premium” for energy supply until policymakers address this reality.

The UK government needs to reassess its energy strategy, taking into account the long-term implications of relying on imported energy. This includes investing in renewable sources, improving energy efficiency, and diversifying its energy mix to reduce dependence on imported fuels.

The latest price cap increase is a stark reminder that the cost-of-living crisis is far from over. Policymakers must take action not only to shield consumers from the economic impacts of the Iran war but also to tackle the fundamental issues driving this crisis: volatility, reliance on imported energy, and the associated “risk premium” that consumers are paying.

The UK can no longer afford to be complacent about its energy security. The geopolitics of energy demand a more proactive approach, one that prioritizes long-term solutions over short-term fixes. Anything less will only perpetuate the cycle of price shocks, leaving Britons facing an uncertain future.