Escalation in Middle East conflict raises risk of renewed construction cost pressures

Construction costs could face renewed pressure after Brent crude oil prices climbed above $100 per barrel for the first time since May on Thursday. 

Brent crude, the international benchmark for oil prices, breached the $100 threshold following a fresh escalation in the Middle East conflict. 

Prices had previously fallen to around $80 per barrel after a temporary ceasefire between the US and Iran eased concerns over disruption in the Strait of Hormuz. 

However, they rebounded sharply after Houthi militia targeted oil tankers in the Red Sea, threatening another critical global shipping route. The outlook has been further complicated by the collapse of US-Iran ceasefire arrangements and an increase in US military strikes against Iran.  

Sam Parkin, senior economist at BCIS, said the latest developments had reintroduced uncertainty into the construction cost environment. 

‘Brent crude prices have climbed again amid fresh escalation in the Middle East. They had previously eased to around $80 per barrel as tanker traffic through the Strait of Hormuz partially recovered, with markets pricing in the prospect of a US-Iran deal and continued improvements in passage through key shipping lanes,’ he said.  

‘The latest escalation has materially disrupted transit once more, while heightened risks around the Bab al-Mandab Strait have introduced an additional chokepoint, putting further pressure on prices.  

‘Oil-derived products and energy-intensive products, such as aluminium, steel, cement, glass and chemicals, are among those most likely to come under renewed cost pressure if higher energy and shipping costs persist. Existing supply contracts and manufacturing capacity should slow how quickly that reaches site level, but firms without stock or long-term procurement arrangements are likely to be more exposed.  

‘For projects being priced now, fluctuation clauses linked to published cost indices remain a more robust way of sharing this risk than trying to predict where oil prices will settle.’ 

BCIS polling conducted in early July found that 80% of construction professionals, the majority cost consultants and surveyors, expected materials costs to rise over the next 12 months. 

Further polling later in the month found that 59% believed the Middle East conflict was already affecting UK construction tender prices, up from just over one-quarter in March. 

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