The US-Israeli War on Iran: A Catalyst for Change in Energy Policy

The ongoing US-Israeli war on Iran has sent shockwaves throughout the Middle East, leading to significant geopolitical instability. This conflict has not only inflicted a staggering human and environmental toll but has also triggered one of the most dramatic oil-price fluctuations in recent history. As crude oil prices soared above $100 per barrel, the repercussions have rippled through global stock markets, increasing government borrowing and highlighting the urgent need for policymakers to recognize that this energy shock is not merely a transient crisis; it is a new reality that demands a strategic response.

Geopolitical Turmoil and Economic Resilience

In an era characterized by geopolitical upheaval, the resilience of economies hinges on a fundamental shift in how we produce and consume energy. The current landscape necessitates a mission-oriented green industrial strategy, coupled with a macroeconomic framework that prioritizes strategic public investment. Such an approach can help secure living standards while simultaneously building economic resilience.

Immediate measures to alleviate the financial strain on households and businesses must align with broader economic objectives. Policies that merely prop up fossil-fuel profits should be viewed as failures. Instead, we need a transformative approach that addresses the root causes of energy volatility.

The Impact of Energy Shocks

The recent energy crisis serves as a stark reminder of the fragility of our energy systems. Iran’s threats to close the Strait of Hormuz during the 12-day conflict last June exemplified the precariousness of global oil supply routes. The UK, heavily reliant on natural gas, has been particularly vulnerable, experiencing a 50% increase in wholesale energy prices since the onset of the war. This situation underscores the importance of diversifying energy sources and reducing dependence on fossil fuels.

Lessons from the UK

The UK’s experience offers valuable lessons for other nations. Despite progress in advancing clean energy initiatives, the link between gas and electricity prices remains unbroken. As energy prices continue to rise, the UK government faces mounting pressure to protect households from further financial strain. The Office for Budget Responsibility’s projections for declining inflation have already been derailed, with food and energy costs contributing significantly to rising consumer prices.

The Role of Government in Crisis Management

Governments must play a proactive role in ensuring that crises do not disproportionately benefit a select group of shareholders. The energy shock of 2022-23 allowed corporations to extract excessive profits, raising questions about the fairness of the economic system. A well-crafted government response can transform crises into opportunities for meaningful economic activity and broader transformations.

UK Prime Minister Keir Starmer and Chancellor Rachel Reeves have adopted a zero-tolerance policy toward price gouging, but the effectiveness of such measures hinges on their implementation. The UK’s Energy Price Guarantee, which subsidized suppliers, has faced criticism. In contrast, Spain and Portugal’s approach of capping gas prices for electricity generation has proven more effective in controlling inflation.

The Interconnectedness of Energy and Economy

Energy shocks reverberate throughout the economy, as oil and petroleum products are essential inputs in manufacturing, transportation, and agriculture. The current high-interest rate environment complicates matters further, as rate hikes make investments in renewable energy more expensive. This situation risks choking off public investment in critical areas such as education and healthcare.

To break this cycle, governments must address inflation at its source rather than relying solely on central banks. A focus on green investment can yield significant benefits, including higher productivity, job creation, and improved living standards. The UK’s independent climate watchdog recently confirmed that every pound spent on achieving net-zero emissions generates substantial economic value.

A Call for Entrepreneurial States

This energy crisis presents an opportunity for entrepreneurial states to develop the necessary capacities and institutions to secure affordable essentials and prevent opportunistic profiteering. As John Maynard Keynes noted, the state must provide direction and investment when private sector confidence falters. Governments must seize this moment to minimize human suffering and invest in long-term economic resilience.

In summary, the US-Israeli war on Iran has underscored the urgent need for a comprehensive reevaluation of energy policies. By embracing a mission-oriented approach to green industrial strategy and prioritizing public investment, governments can navigate the complexities of the current energy landscape while fostering sustainable economic growth.