Crude oil: an early indicator of construction cost pressures

As the conflict in the Middle East continues to evolve, global markets have reacted sharply to new developments. Energy markets are particularly sensitive to geopolitical risk, and price movements can be rapid as expectations shift. BCIS Senior Economist Sam Parkin explains that, while some movements reflect short-term reactions to political announcements, others may signal genuine risks to global oil supply.

For the construction sector, sustained increases in oil prices can influence costs through several channels. Energy-intensive materials such as steel, cement and bricks are affected by changes in energy prices, while higher fuel costs increase transportation expenses across supply chains. Petroleum-derived materials, including bitumen used in road construction, are also directly linked to crude oil prices. If energy prices remain elevated for a prolonged period, these pressures can gradually feed through to building costs.

Brent crude prices briefly surged to $119 per barrel on Monday 9 March following reports that Iranian oil facilities had been damaged. Prices subsequently fell back to around $90 per barrel after comments suggesting the conflict could end soon. This rapid reversal illustrates how sensitive oil markets are to political developments and shifting expectations.

Although predicting the course of the conflict remains difficult, the targeting of Iranian energy infrastructure introduces a clear supply risk. The extent of any damage will be important in determining whether Iranian oil exports are disrupted. If exports were significantly reduced, a meaningful portion of global supply would be removed from the market, placing upward pressure on crude prices even after the conflict ends.

Shipping through the Strait of Hormuz represents another major risk. The strait is one of the most important oil transit routes in the world, with roughly 20% of global oil trade passing through it. Major exporters that rely on this route include Saudi Arabia, Iraq, Kuwait, the United Arab Emirates and Qatar. While some pipelines allow oil to bypass the strait, maritime transport remains the primary export channel for much of the region’s production. Any prolonged disruption to shipping through the strait will tighten global oil supply considerably.

Several possible responses have been discussed. One option is for the United States to escort commercial tankers through the Strait of Hormuz. However, previous attempts to secure shipping routes, such as during the Red Sea disruptions, have shown that escorts do not always fully eliminate risk to maritime trade. A ceasefire or broader de-escalation of the conflict would likely ease these concerns, although any agreement may remain fragile and leave markets vulnerable to renewed disruption.

Another policy tool available to advanced economies is the release of emergency oil reserves. Members of the G7 (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) maintain strategic petroleum reserves that can be deployed during supply shocks. Such releases can help stabilise prices in the short term, but they are ultimately a temporary measure. Drawing down reserves leaves countries more exposed to future disruptions, and rebuilding stockpiles later can itself contribute to upward pressure on prices.

Increased production from the Organization of the Petroleum Exporting Countries (OPEC) could also offset supply losses elsewhere. Historically, however, OPEC has often responded cautiously to sudden oil shocks, meaning supply adjustments may not occur immediately.

In practice, the outcome is likely to involve a combination of these factors. Even if the conflict were to ease and shipping through the Strait of Hormuz resumed normally, damage to infrastructure or reduced Iranian exports could still constrain supply. Strategic reserve releases might temporarily offset these pressures, but such measures cannot be sustained indefinitely. Over time, the need to rebuild reserves and adjust global production would continue to influence prices.

For UK construction, the key question is whether any disruption proves temporary or develops into a sustained supply shock. Short-lived price spikes may have limited impact on project costs, but prolonged increases in energy prices can feed through to energy-intensive materials, transport costs and eventually tender prices. Monitoring developments in energy markets therefore remains important when assessing cost risks for projects over the coming months.

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