What does the surging oil price mean for your finances?

Thinking about money during a time of war can feel uncomfortable, especially when the human cost is so devastating. 

But conflicts don’t happen in a vacuum. 

When they hit a region as economically important as the Middle East, the ripple effects can be felt globally, including across UK household finances. It’s therefore sensible to take stock and understand how events abroad might influence your financial position.

A large share of the world’s energy comes from the Middle East, and the current conflict has pushed up oil and gas prices sharply. How long the shock will last is the key variable and a big unknown at this stage. There are echoes of the 1979 oil crisis when supply disruption led to slower economic growth, weaker markets, and surging inflation. Yet today’s situation may prove more temporary. Plus, many economies are more insulated than they were in the 70’s with more diverse energy production.

Let’s break down what this all means for your money.

Investment portfolios

Oil shocks can be challenging for markets – and this time is no exception. Higher energy prices act as friction on economic activity. When something becomes more expensive, consumers and businesses are likely to cut back, and the wheels of commerce turn that little bit slower. That’s why the impact has been felt across global markets, to one degree or another.

Since the conflict broke out, major European indices such as the FTSE 100 and German DAX have posted their steepest weekly drops since last April, as investors fear a prolonged period of higher energy costs. US markets have held up slightly better as the nation is a net oil exporter, which offers a degree of insulation. 

Bond markets have also come under pressure. When oil prices rise, investors worry about broader costs rising too. Inflation eats into the value of future fixed interest payments, so bond prices fall and yields rise. That’s exactly what we’ve seen again, with the debt of countries most sensitive to energy costs being most affected.

A case in point is the UK. Before the conflict, UK government bonds (gilts) had rallied on the belief inflation had peaked. But with UK inflation still at 3% and European gas prices leaping higher, markets now expect the Bank of England (BoE) to be far more cautious about cutting interest rates. Add in the UK’s unusually high share of inflation linked debt, and the government’s tight fiscal position, gilt yields could remain elevated for some time.

So, what does this mean for your portfolio?

We always recommend investing for the long term (five years or more) with a diversified investment approach. In times like this, the best course of action is usually to sit tight. Market timing – especially during geopolitical crises – is notoriously difficult. Unless your portfolio is heavily concentrated in a single sector or region, the ups and downs should be manageable.

There aren’t many hiding places from an inflationary shock of this nature. The potential ones include:

• short-term bonds, high-quality bonds
• gold
• energy stocks

Yet even these have seen some volatility. During market turmoil, even traditional  ‘safe haven’ or contrarian assets can go into reverse as reactionary investors sell whatever they can to make up for losses elsewhere.

Read more: How to survive market volatility 

Fuel and energy prices

Most people first feel the brunt of an oil shock at the petrol pump, or through energy bills.

Because crude oil is the main ingredient in petrol and diesel, a rising oil price increases the price of a full tank. But in the UK, the impact is softer than many imagine. More than half of the price of a litre of petrol is tax, so the oil itself accounts for less than a third of the final price.

The price of brent crude oil has risen by roughly $20 since the war began. Analysts say every $10 increase in the oil price pushes up pump prices by roughly 7p a litre. This knock-on effect will be felt by other areas if travel could too. With jet fuel prices rising, flights may become pricier, and those summer holiday budgets might need to expand a little.

Higher energy prices don’t stop with transport. 

Almost every business relies on energy in some way – whether that’s through powering factories, running delivery fleets, or heating stores and offices. When oil and gas prices rise, they ripple across supply chains and push up the cost of goods and services across the whole economy.

For UK households, gas prices have also shot up. This could potentially have a bigger impact on inflation than oil. The regulator, Ofgem, has already published the price cap for energy bills for the second quarter, so any increase would be from July onwards. Additionally, wholesale gas prices only account for less than half of the cap calculation so the effect of higher gas prices is diluted. 

Nonetheless, if energy prices don’t recede for a long time, we can certainly expect higher electricity and gas bills for the second half of the year.

Interest rates, mortgages and savings

When oil prices rise, they push up the price of almost everything. Delivering goods costs more. Manufacturing costs more. Heating offices, running factories, transporting food – you name it, it all costs more.

For central banks like the BoE, whose job it is to keep a lid on inflation, that’s bad news. It makes keeping to their inflation target of 2% a lot more difficult when cost pressures become self-reinforcing. Businesses raise prices to cover higher costs and workers ask for bigger pay rises to keep up, which pushes costs up further. Then we risk ending up in an inflation doom loop that’s hard to break.

As a result, when inflation picks up – even for reasons outside the central bank’s control, like an energy price surge – policymakers tend to pause any plans to cut interest rates. They might even consider raising rates if they fear inflation could run away from them.

What could be next for UK interest rates?

Before the conflict, the expectation was for a couple more interest rate cuts in the UK in 2026 from the current 3.75%. Those hopes have now largely evaporated as the inflation outlook has become murkier. In other words, cheaper borrowing is likely further away than many had hoped at the start of the year.

At the BoE’s latest meeting, the Monetary Policy Committee voted 5-4 to hold the base rate where it is. Four members wanted to cut, which gave borrowers some hope. But with fresh inflationary pressures building, the BOE is likely to take a wait-and-see approach.

This shift has had an abrupt impact on mortgage rates. Borrowers had enjoyed falling rates earlier in the year, but that’s now reversing. The markets expect interest rates to stay higher for longer as lenders’ funding costs have risen with some banks cancelling planned rate reductions. As a result, fixed‑rate mortgage prices have started to rise again, and hopes of cheaper mortgages in 2026 may need to be dialled back. If this persists, it could dampen housing market sentiment too.

If there’s a small silver lining to interest rates remaining higher for longer, it’s that savings rates may stay attractive too. But don’t expect a surge. Banks tend to adjust savings rates more slowly than mortgage rates. 

The bottom line

The conflict in the Middle East is a reminder of how interconnected everything is. Energy remains a cornerstone of the global economy, and when its cost jumps, the effects spread quickly.

Read more: Market update as Middle East war continues to escalate

The key variable is duration. If disruption is short-lived, then discomfort around energy costs and the impact on markets will likely fade. A drawn‑out conflict could lead to something closer to an energy shock, with higher inflation, weaker growth and more financial turbulence. A “stagflation” scenario, that is both bad for markets and for household budgets.

The best approach is to stay calm, diversified, and informed. The situation remains fluid, and visibility is limited. But understanding any vulnerabilities in your finances puts you in a stronger position, whatever happens next. We’ll be keeping you up to date with all the latest views from our Research Team in the Insights section of our website.