Greed didn't close the Strait of Hormuz
Plus: a debate with ASH and the largest bubble in history
In today’s newsletter:
The UK’s vulnerability laid bare
The truth about insurance-based healthcare
Can free markets save the West?
As we head into the second month of war in the Middle East, the world economy is faced with a fairly straightforward maths problem.
Prior to the war, global demand for oil amounted to about 100 million barrels per day. Since the Iranian closure of the Strait of Hormuz to most international shipping, only 80 million barrels per day have been able to make it onto the world market. This means, at least until supply is restored, demand for 20 million barrels of oil per day needs to be destroyed through higher prices.
The consequences of this will be very clear to British motorists. On Friday, the average price of a litre of petrol climbed above 150p for the first time since May 2024. While petrol prices remain significantly below the 2022 peak after Russia’s invasion of Ukraine, and in real terms below the 2011-13 period when prices hovered around 140p per litre (roughly £2 in 2026 values), the rapidity of the rise and the likelihood of further increases is a cause for concern.
Keir Starmer and Ed Miliband have both responded to rising prices by threatening to crack down on ‘profiteering’ retailers. Assuming they actually believe this, they are seriously mistaken about the nature of the problem.
In reality, oil price rises are passed through to customers quickly, partly because retail margins are tight. The average British forecourt makes just 4.7p per litre of petrol sold, which leaves little slack for retailers to absorb wholesale cost increases.
Perhaps we should be grateful that so far in the UK, the government has only talked about making the situation worse.
In recent weeks, governments in Poland, Romania and Hungary have introduced caps on retail fuel prices, while Spain has announced it will cut VAT on fuel from 21% to 10%. These policies may well be popular in the short term, but do nothing to address what is fundamentally a problem of supply.
Worse, if demand is not managed through higher prices, the result will be misallocation and shortages. We are already seeing this happen. On Monday, Slovenia, which has also capped fuel prices, was forced to introduce rationing on petrol and diesel to deal with excess demand.
Against this background, it was interesting reading the economic historian Tyler Goodspeed’s new book, Recession: The Real Reasons Economies Shrink and What to Do About it, which was published in the UK earlier this month.
Among the book’s arguments is that since 1700 in the UK and America, a huge and underappreciated number of recessions have been triggered by energy shocks. The oil crises of the 70s will spring to mind, but Goodspeed argues that high oil prices also played a central role in the 2008 Financial Crisis, while in the 18th century, bad harvests often had similar economic effects to spiking petrol prices today, in that they made fodder for working animals more expensive, driving up transportation and haulage costs.
He also highlights that politicians and pundits have time and again tried to turn recessions into morality plays – blaming ‘greed’, ‘speculation’ or ‘excess’ for what are more often than not problems of supply outside the hands of any individual business.
But perhaps the book’s most important message is the conclusion. After pointing out the ways in which governments have frequently managed to make recessions worse, Goodspeed suggests that when dealing with economic shocks, politicians should, above all, adopt a version of the Hippocratic Principle, ‘first do no harm’.
Daniel Freeman
Managing Editor
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IEA Podcast: Director of Communications Callum Price is joined by Editorial Director Kristian Niemietz and Director General Lord Frost to discuss the OECD’s latest forecasts for growth, New Towns, and an AI future - IEA YouTube
UK vulnerability predates crisis
Responding to the latest OECD economic outlook, Dr Valentin Boboc, Senior Economist at the IEA said:
“The OECD’s numbers confirm the country’s fiscal and economic vulnerabilities predate the current crisis. The UK entered this supply shock with weak growth, a cooling labour market and already elevated energy prices - which is why we are forecast to take the biggest hit from the war out of the major economies.
“The government should tread carefully on the policy response. Broad demand subsidies risk making inflation stickier and pushing up borrowing costs, making it harder for investment and employment to recover. Priority should be given to removing the barriers that prevent the economy from producing more.”
News and Views
Are we in the largest bubble in history? Steve Baker and Max Rangeley debate, IEA YouTube
How can we fix healthcare spending? Kristian Niemietz debates Mariana Mazzucato and others, The Kings Fund
‘I hope that future instalments of this project will go further and break out of the dominant, narrow, state-centric mindset altogether. While the Fund recognises that there are alternatives to further expansions of the NHS budget, so far, the only alternatives they are prepared to consider is expanding other branches of the welfare state instead. Why not consider the possibility that an overbearing, interventionist government might not always be a force for good? Why rule out non-state solutions by design?’
EU rules legislation being brought forward in King’s Speech, Lord Frost quoted in the Financial Times
“The new bill will sideline democratic UK lawmakers by making a whole range of EU laws applicable in Britain without us getting any say in them. That’s not alignment, it’s subordination.”
What is supply and demand? The latest episode of Economics 101 with Dr Steve Davies, IEA YouTube
The (real) IEA has spoken:
The EU’s Failed Green Deal Is a Warning to Us All, Magnus Henrekson, Christian Sandström, and Mikael Stenkula on the failures of mission-directed governance in the EU, FEE
