Oil prices surged $10 in mid-June due to conflict between Israel and Iran, raising concerns about inflationary pressures and economic stability.

The possibility of rising global oil prices poses a significant inflationary threat to the UK economy. Higher crude costs increase production and transport expenses, shifting the short-run aggregate supply curve leftward, which raises the general price level and reduces output. This cost-push inflation could delay interest rate cuts by the Bank of England. Consumers may face higher petrol and food prices, squeezing real incomes and dampening demand. If elevated prices persist, the UK’s fragile post-pandemic recovery could be undermined, particularly as households remain vulnerable to energy price shocks.

Oil prices: How the Israel-Iran conflict could affect energy costs - BBC News

1. Using an AD/AS diagram, analyse how a rise in global oil prices is likely to affect the UK’s macroeconomy.

2. Discuss the impact of rising oil prices on a firm in an industry, such as petrochemicals, that uses a lot of oil during production.

3. Discuss the economic benefits and costs of rising oil prices on countries that are (a) net exporters and (b) net importers of oil, using examples including the UK.