True lifelong financial planning for the serious business of life.
True lifelong financial planning
for the serious business of life.
True lifelong financial planning for the serious business of life.
True lifelong financial planning
for the serious business of life.
Category: Financial Planning, Investment management
The Middle East and Oil Prices
The past few weeks have seen one of the most volatile periods of oil trading in recent history. In the days following the outbreak of hostilities between Israel and Iran, oil breached $75 per barrel, up 15% in less than a month. It rose above $80 per barrel after the US President Donald Trump’s “spectacularly successful military mission to totally obliterate” Iran’s key nuclear enrichment facilities and then fell back towards the $75 mark.
When Iran retaliated by firing missiles at the American air base in Qatar – which might have been expected to send prices upward again – the fall turned into a rout, and oil dropped below $66. That was a total decline of nearly 20% in response to what appeared to be terrible news.
The reason is that the Iranian response to the US bombing of its nuclear facilities has been judged as being no more than symbolic. More contentiously, there is now a belief that the conflict is over – supported by Donald Trump’s announcement that Israel and Iran have agreed to a ceasefire to end what he suggested will henceforth be known as the “Twelve-Day War”.
Iran only produces around 3% of the total global oil supply, but there has always been the risk that Iran itself may seek to destabilise oil production and shipping across the Middle East to hit back at Western governments, which it sees as supporting Israel.
Iran could try to disrupt energy supplies by closing the Strait of Hormuz, the narrow sea lane which links the Persian Gulf to the Indian Ocean, through which a quarter of the world’s seaborne crude oil and liquified natural gas shipments pass. Indeed, following the US bombing of Iran’s nuclear sites, Iran’s parliament voted to block the Strait.
Iran has repeatedly made this threat in the last 40 years. Closing, as opposed to disrupting, the Strait would be a formidable task given the weakened state of Iranian forces and the near certainty that the US and its allies would resist any attempt to stop traffic. Iran has never previously been able to close the Strait, despite laying mines, occasional seizures of vessels, and the use of missiles against Western vessels.
International naval coalitions, led by the US, have ensured that the waterway continued to operate with minimum disruption. There is little doubt, however, that Iran has the capacity to disrupt traffic, possibly significantly, and in a way that could keep energy prices higher for longer. A prolonged closure of the Strait of Hormuz is what ING-Barings calls an “extreme, worst-case scenario”, albeit one that, the bank estimates, could take the oil price to over $150 a barrel.
Conflict in the Middle East, and the ensuing spike in oil prices, have been harbingers of Western recessions in 1973, 1979, and 1999, but the world is better placed to deal with disruption to oil supply than in the past.
Energy markets are more efficient, integrated, and contestable than they were in the 1970s. Shale fracking has led to a huge increase in US energy production, weakening OPEC’s hold over supply. Consumer nations now have petroleum reserves that can be used to protect against shortages. Oil’s share of global energy supply has fallen as a result of greater efficiency in consumption and as countries have switched to renewables. Global GDP is less oil-dependent than in the past. It takes less than half the amount of oil to produce one unit of GDP than it did in the 1970s.
Despite 18 months of conflict in the Middle East, oil prices are still well below the levels before Hamas’s attack on Israel on 7 October 2023. Part of the reason is that oil demand from China, the world’s second-largest oil user, has softened. Some smaller OPEC producers have exceeded their production quotas, which has reduced the effectiveness of OPEC’s attempts to bolster prices. Despite low prices, Saudi Arabia has increased its production of oil this year, a move the Financial Times said, “prompted speculation that the cartel [OPEC] was responding to White House pressure to boost output ahead of a confrontation with Iran”.
The world may be less sensitive to high oil prices than in the past, but it is not immune to them. Uncertainty surrounding the conflict and volatility in energy and financial markets, particularly if prolonged, could hamper the world economy.
We must hope that the ceasefire announced on the 24th of June holds good and allows for lasting peace in the Middle East. Equally, we must also hope that somehow, by some miraculous intervention, peace can be found between Russia and Ukraine.
UK Spending Review 2025
On 11 June, Chancellor of the Exchequer Rachel Reeves unveiled the new government’s comprehensive Spending Review, outlining a multi-year fiscal strategy aimed at revitalising the UK economy, restoring public services, and addressing long-term regional and sectoral imbalances.
Marking the first major economic statement by the new Labour Government, the review sets out ambitious priorities across health, defence, housing, infrastructure, and science, while also maintaining a stated commitment to fiscal responsibility.
At the heart of the review is a pledge to increase day-to-day departmental spending by an average of 2.3% per year in real terms over the next three years. Capital investment will rise by approximately 3.6% annually through to the end of the decade. Reeves framed this as a break from the austerity-era mindset, positioning the government as an active agent in long-term economic renewal while keeping within updated fiscal rules that prohibit borrowing for current spending.
One of the most notable beneficiaries of the review is the NHS. The government has committed to annual real-terms increases of around 3%, equating to £29 billion more for frontline health services by 2028. This funding will support expanded staffing, new diagnostic technology, and greater digitisation.
Similarly, defence spending will rise significantly, fulfilling the government’s promise to raise military expenditure to 2.6% of GDP by 2027. This includes an £11 billion uplift, with specific investments in munitions, nuclear submarines, and a new Border Security Command, funded partly by savings from the end of asylum hotel usage.
Housing also emerged as a top priority. The review allocates £39 billion over ten years for social and council housebuilding, effectively doubling current investment in affordable homes. An additional £10 billion will be channelled into Homes England to accelerate private sector housing projects. These moves reflect Labour’s aim to address the UK’s chronic housing shortage while boosting construction-led economic activity.
Infrastructure investment will be ramped up, with £113 billion committed over four years. Flagship transport projects include £3.5 billion for the TransPennine rail line connecting York, Leeds, and Manchester, and £2.5 billion for the East-West Rail project linking Oxford and Cambridge. Funds will also be directed towards regional mass transit systems in Birmingham, Bristol, and Manchester, underpinning the government’s broader goal of “levelling up” left-behind regions through connectivity.
In science and technology, Reeves announced an £86 billion package by 2029 to support innovation, clean energy, and artificial intelligence. Over £14 billion is earmarked for nuclear energy – including Sizewell C and small modular reactors – alongside major investments in carbon capture and regional R&D hubs.
Schools will receive an additional £4.5 billion annually by the end of the period, funding special educational needs provision, school meal expansion, and the rebuilding of 500 school sites.
Justice and policing will see modest increases. Police forces will benefit from a real-terms uplift of 2.3% per year, with the goal of recruiting 13,000 new neighbourhood officers. The prison estate will receive £4.7 billion in capital funding to alleviate overcrowding, supported by policy changes aimed at reducing the number of offenders recalled to custody for minor breaches.
Despite these increases, the Chancellor insisted that fiscal rules will be respected. The government aims to avoid borrowing for current spending, relying instead on reallocations from lower priority areas, improved efficiency, and asset sales. For example, foreign aid budgets and asylum-related accommodation costs are being cut or restructured. Reeves also hinted that while tax rises are not immediately planned, further revenue measures may be necessary if economic growth underperforms.
Initial reactions have been mixed. Public sector leaders in health, policing, and education welcomed the increased support but warned that it may not fully compensate for past underfunding or rising demand. Fiscal watchdogs praised the attempt at discipline but cautioned that the long-term sustainability of the plan hinges on optimistic growth assumptions. Bond markets reacted calmly, indicating investor confidence in the government’s approach, at least in the short term.
Economic growth is the key to success, otherwise, government borrowing, taxation, and interest rates will all rise.
In 2012, Eike Batista had an estimated fortune of more than $35 billion. The self-made Brazilian billionaire created an empire that stretched from mining to oil to public works. Many considered him to be the pride of Brazil. Barely two years later, he had lost all $35 billion and owed another $1.2 billion to creditors.
How does this happen? How does a $35 billion portfolio evaporate practically overnight? You could point to several poor decisions, but perhaps the biggest of all was concentration risk, Warren Buffett’s favourite destroyer, leverage, and the invisible enemy, inflation.
When it comes to making money, concentration is often your friend, but when it comes to keeping it over the very long term, concentration is your enemy.
Just ask Michael Saylor, CEO of Microstrategy and he of Bitcoin fame. Back in the original tech boom in 1999, Microstrategy’s share price exploded twentyfold, and Saylor’s net worth was $7 billion at the peak. Two months and one accounting irregularity later, the shares were down 90%. Over the next couple of years, the shares fell another 90% (yes, that is possible), and the once multi-billionaire was no longer such. 25 years later, Saylor has done it again with his venture into Bitcoin, with his net worth currently reported to be over $10 billion. One wonders whether he will do a better job of hanging on to some of it this time!
While these may be extreme examples, what typically creates wealth of any scale is one large, concentrated bet, usually on yourself, which generates a combination of surplus income and capital that can be saved.
It is tempting to think of wealth being passed down through the generations, but fascinating research by Cambria Investment Management backs up the old saying “from shirtsleeves to shirtsleeves in three generations”.
The reality is that 70% of wealthy families lose their wealth by the second generation, 90% by the third generation. So, what’s going on? It turns out that the key to keeping wealth over long time periods requires a very different strategy from what creates it in the first place.
Let’s say you’ve got enough, or more than enough. “Funded contentment” is the description I have heard to describe the purpose of wealth accumulation. Essentially, enough money to live the life you’ve dreamed about.
Now, that amount will vary for each of us. For some, it could be £500,000, for others £1 million, and for some, £20 million or even more wouldn’t be enough. But let’s say you hit your number. What now? What if you no longer care about increasing your wealth, but rather just want to simply protect and enjoy it.
According to the study by Cambria Investments entitled “What is the Safest Investment Asset”, based on US markets over the last 100 years, no single asset class is immune from drawdowns when taking into account inflation
Starting with “risk-free” short-term US Treasury bills, in nominal terms, they have delivered 3.4% per year with zero drawdowns. However, as investors, we are interested in real (after inflation) returns. After inflation, the maximum real drawdown in the “risk-free” asset was -49%. Periods of high inflation, such as the 1970s and more recently after Covid in 2020, can lead to material losses in real terms as, often for political necessity, cash rates are held materially below the rate of inflation. As an aside, good, old-fashioned cash under the mattress lost 95% after inflation over 100 years.
Taking a generational view, there is no single asset that is guaranteed to preserve your wealth in real terms, but fortunately, over shorter time horizons, such as an individual’s retirement, there are things you can do to reduce the risk of such material drawdowns:
Looking through the fog of war
Recent events in the Middle East, and Eastern Europe, are so terrible in human terms that it seems wrong to be discussing the implications for investment. But that is what investors must do.
However horrible things are, and however huge the uncertainties, the plain fact is that investors have to try to work out what might happen to the economies of different countries, to the price of different types of assets, to interest rates, inflation, and so on – and all through the fog of war.
While we cannot know what will happen in the coming months in either the Middle East or Eastern Europe, and there remains the possibility that there will be a period of extended turmoil, the practical question facing all of us is how best to invest in an increasingly dangerous world.
Some short-term reactions to the recent escalation in the Middle East crisis have already become evident, but they have been strangely muted. The price of gold jumped, though it is still a little bit below its all-time peak in April. Oil prices climbed to above $80, but now at around $65 a barrel, are still down on where they were at the start of this year. As for equity markets, naturally, they too have taken a hit, but the major indices, including even the Israeli stock market, are still close to all-time highs.
Observers might be forgiven for thinking that financial markets don’t care about geopolitical shocks. Disaster fatigue is a possible explanation for the lack of investor panic right now. Investors have faced such an overload of disorienting shocks that they have adapted to handling pain, without panic, or are so stunned that they cannot fully process the fast-changing recent events. It is almost as if financial markets accept continuing conflict as being a fact of life, just another thing they have learned to cope with.
But have investors lost touch with reality? There are two responses to this question.
Firstly, the world economy is huge and as we have seen in the past three years, regional conflicts will always break out. What has happened in the Middle East in the last few weeks, and the Ukraine/Russian war three years ago, is just part of that pattern. Because the global economy is so big, the ability of these conflicts to inflict damage beyond the countries and people affected is limited.
To put the point harshly, the argument is that while this is horrible for the people caught up in the conflict, it is manageable as far as the world economy goes.
But could this reaction be far too complacent? Quite aside from the human suffering, war destroys wealth. Resources must go into reconstruction and additional defence spending. Money that goes into military hardware and armed services is money that will not be available for education, health, and all the other things that governments support.
Though these conflicts are regional, and we hope that they will remain so, it would be naive to suppose we will not feel the effects across the developed world. That leads to practical implications for all of us. Disruption is never good. It puts up the cost of everything and leads to higher government borrowing. That inevitably puts up interest rates, and since central banks will probably not put rates up enough, the outcome must be higher than expected inflation.
So, what should investors do?
We should take comfort from what happened after the Second World War which saw the destruction of life and wealth far, hopefully, beyond anything on the horizon now.
Industry and commerce recovered quite swiftly, and after a lag, share prices reflected that. House prices took a while to steady before starting their long, if uneven, march upwards
Inflation was suppressed at first but then burst out even more viciously than we have seen in the past five years. And anyone who held cash or who bought government securities lost their shirts as inflation reduced the purchasing power of fixed interest investments and cash deposits.
We should go on saving and investing. We should hold as little cash as practical and only invest in gilts to diversify or for tax considerations.
And then there are equities, and please note this! Despite everything that has been thrown at British, European, North American, and Far East companies, stock market indices are still hovering around all-time highs. Which begs the question; what could they do when the clouds lift a little?
As always, we thank you for your continued support, and we look forward to updating you regularly throughout 2025. Please get in touch if you have any questions.
Keith W Thompson
Authors Note: My monthly commentaries are usually penned a week or so before the month end. I try to make them as non-time sensitive as possible but in the fast-moving world in which we live, events can occasionally render the commentaries out of date although still largely relevant. I trust readers will bear this in mind. Thank You.
Any investment performance figures referred to relate to past performance which is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments, and the income arising from them, can go down as well as up and is not guaranteed, which means that you may not get back what you invested. Unless indicated otherwise, performance figures are stated in British Pounds. Where performance figures are stated in other currencies, changes in exchange rates may also cause an investment to fluctuate in value.
The content of this article does not constitute financial advice and you may wish to seek professional advice based on your individual circumstances before making any financial decisions.
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