Governments Under Pressure as Oil at $91 Complicates Economic Policy

Governments around the world are facing rapidly deteriorating economic conditions as the Iran conflict drives oil prices past $90 a barrel and upends the relatively benign economic backdrop they had been counting on for 2026. Interest rate cut hopes have been dashed, inflation forecasts are being revised upward, and stock markets have fallen sharply — leaving policymakers with few good options.
In the UK, the situation has moved from manageable to concerning with startling speed. The probability of a Bank of England rate cut this month fell from 80% to just 15% in the space of days, as the prospect of energy-driven inflation made a reduction in borrowing costs difficult to justify. UK bond yields recorded their biggest weekly jump since the Liz Truss mini-budget crisis of September 2022, adding to the pressure on government borrowing costs.
The European Central Bank faces a similarly difficult position. Money markets have almost fully priced in a rate rise from the ECB by year’s end — a remarkable reversal of expectations in the space of a week. Eurozone bond yields recorded their biggest weekly jump since March of the previous year. For European governments already struggling with high debt levels and sluggish growth, the prospect of rising interest rates and higher energy costs is deeply concerning.
The drivers of the economic pressure are rooted in the Gulf. Kuwait has already cut production at storage-full fields, and energy consultants warn Saudi Arabia and the UAE face the same crisis within 20 days. Qatar’s LNG exports have been disrupted by a drone strike, sending European gas prices to three-year highs. Qatar’s energy minister has warned that continued conflict could push oil to $150 a barrel — a level that would place enormous strain on government budgets across the world.
Beyond the immediate crisis, governments are also confronting longer-term questions about energy security and supply chain resilience. The Iran conflict has exposed the global economy’s continuing dependence on a small number of critical energy infrastructure nodes, many of which are concentrated in one of the world’s most geopolitically unstable regions. Building greater resilience into that system will require significant investment and political will — and will take years to achieve.