How captive sailors in Iran can hurt the pound in your pocket

By MoneyhighStreet Staff. Published on March 30, 2007 This post currently has no comments.

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Fifteen sailors being held captive in Iran may seem like news that doesn't directly affect you, but have you noticed what is happening to petrol prices at the moment?

We'll look at the link between events such as these and the pound in your pocket in this article.

The rise and fall of tensions in the middle east often trigger rises and falls in oil prices. This is because we rely so heavily on the oil producing countries in that region and the narrow waterways for the transport of the oil to the west in super tankers.

Trouble in the Gulf can reduce the flow of oil, triggering potential shortages that then forces oil prices up. To matters worse, Iran is a major oil exporter and can use this as bargaining power.

Oil prices have risen to over $66 a barrel, the highest they've been this year. Petrol and diesel prices have been edging upwards - diesel is around 91p per litre again.

Petrol and diesel price rises are painful, of course, but the effect doesn't stop there. With our economy so reliant on oil, increased prices of this “black gold” feed straight into increased inflation.

With its determination to keep inflation within agreed limits, the Bank of England has to use interest rates to manage inflation as best it can. As inflation rises, so must interest rates.

So unfortunately if the oil prices remain high, as tensions in the gulf heat up, there is more chance that further interest rates rises will be required to contain inflation.

Interest rate rises increase the cost of borrowing so our mortgage and loan repayment costs are increased too, unfortunately.

The captive sailors are only part of the problem, though. There is underlying tension between Iran's nuclear ambitions and the West's concerns about its nuclear weapons capabilities.

Concern over Irans belligerent position has been around for about a year now - it was partly this that kept oil prices high last year. The arrest of our sailors may be linked into the bargaining position adopted by Iran in it's negotiations with the West about its nuclear capabilities.

Prolonging the ordeal of these captives and maintaining a state of tension with Iran is bad for oil prices, at least from a consumers point of view.

So there is very much a link between 15 sailors languishing in a prison in Iran and the pound in your pocket. Lets hope they get freed soon, for their sakes, of course, and for ours too.

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