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What began as a geopolitical flashpoint between the US and Iran is quickly becoming a commercial challenge for food and drink businesses, as energy volatility and supply disruption drive up costs across the value chain. Joshua Robinson, assistant director at NFU Energy, takes a look at what is currently influencing energy prices and shares how the conflict in the Middle East is affecting food and drink business here in the UK.

Since early March, the escalating conflict involving the US and Iran has rapidly evolved into a major disruption for global energy markets. What began as targeted strikes has quickly intensified into an all-out war, with retaliation across the Gulf, attacks on energy infrastructure and critically, the closure of key shipping routes.

At the centre of the disruption is the Strait of Hormuz, a vital route used to transport around 20% of the world’s oil and liquified natural gas (LNG) supply. Within days of the conflict escalating, the route was effectively shut down, triggering immediate market reaction. Gas prices surged by up to 50% in some regions, while Brent crude climbed sharply, recently exceeding $120 per barrel.

LNG markets were hit particularly hard. The world’s largest LNG site in Quatar suspended production early in the conflict, removing a significant portion of global supply overnight. At the same time, tankers in the region started to come under attack, pushing war-risk insurance premiums to extreme levels, creating what has become an all but formal closure of the Strait. Some operators even declared force majeure, voiding existing contracts, instead diverting oil and gas tanker shipments to the highest bidder.

While shipping disruption triggered the initial price spikes, the longer-term concern is infrastructure. Attacks on shared gas fields and processing facilities across the region have raised the prospect of prolonged outages. Unlike shipping delays, LNG production cannot be reinstated quickly, with some estimates suggesting it could take months to resume output and years to fully repair damage. So, for energy markets, this means the longer the crisis goes on, the longer the road to normality.

Energy impact

In the UK, the impact is already being felt, with longer-term challenges still looming on the horizon. So far, we have seen wholesale energy prices rise significantly, with average costs increasing by up to 30% compared to before the start of the conflict. Although fluctuations are happening daily, the overall trend is that prices are going up, and this will likely remain the case until we see a full resolution.

As a net importer of energy, the UK is particularly exposed to global supply shocks, especially in the LNG market. The current situation compounds with the fact that our national gas reserves are at historically low levels.

In response to addressing the previous energy crisis that emerged in the wake of the Russia-Ukraine conflict, the EU and several other countries amended historic rules requiring gas storage facilities to be at 90% capacity by 1 November each year. This guidance was changed to allow for an extension to 1 December, alongside a rule that gave a 10% tolerance on the final storage number. In previous years, this has made the spring and summer important months to rebuild reserves ahead of winter.

With intensifying global competition for energy supplies, both the cost and the ability to replenish this buffer remain constrained, as Europe and the UK risk being outbid by Asian markets that are aggressively securing available supply amid peak demand. The result is a market that is both tighter and more volatile, as competition for available resources will tighten further as winter approaches.

A double cost pressure for F&B businesses

For food and beverage businesses, rising wholesale prices are only part of the story. Alongside global market volatility, UK businesses are also facing a sharp increase in non-commodity costs, often referred to as standing charges or network costs. These charges, applied to energy bills to fund infrastructure upgrades and grid resilience, have risen significantly this year and are set to continue increasing.

This creates a 'double whammy' effect. On one side, wholesale costs, which typically make up around 30-35% of an energy bill, are being driven higher by global conflict and supply disruption. On the other hand, non-commodity charges making up the remainder 60% are increasing too, adding further pressure to overall bills.

For energy-intensive sectors like food and drink, the impact is substantial and will be felt from several angles. Higher electricity and gas costs affect everything from processing and refrigeration to storage and distribution. When combined with rising diesel prices and upstream pressures in agriculture, the cumulative effect becomes difficult to absorb.

What can businesses do?

While businesses cannot control global events or rising energy costs, they can take steps to reduce their exposure to the current energy crisis.

In a rising market, reviewing your existing energy contracts and considering your options for renewal early, rather than waiting, can help manage risk. Delaying decisions in the hope of prices falling may expose businesses to further increases. Although prices are generally up from where they were, they do fluctuate daily, and there will be more and less favourable times to lock in. Working with a broker to monitor the market can help you do this at the best possible time.

Reviewing your consumption and reducing the energy use, even marginally, can also have a meaningful impact when prices are high, particularly for F&B businesses where energy-intensive processes such as refrigeration, heating and compressed air are common. Energy audits can help unlock savings by identifying and tracking where, when and how energy is used.

Developing a dedicated energy strategy for the future can also help. In times of turbulence, businesses may need to reassess their reliance on grid energy and explore options for diversification to create energy and cost security. This can be done in many ways, so working with a consultant can be helpful as this will depend on the business in question and its unique set up, operations and appetite to risk, but could include on-site generation, alternative procurement strategies or efficiency updates, to reduce cost.

Finally, on the carbon front, there is a growing case for reviewing sourcing models. As global supply chains become more volatile and transport costs rise, sourcing closer to home, working with local farmers and producers may offer both cost stability, resilience and sustainability benefits.

The key takeaway is that even if the current ceasefire holds, the energy crisis is unlikely to be a short-lived disruption. Even if geopolitical tensions ease, the damage to infrastructure, shifts in global supply routes and ongoing investment in domestic energy systems will continue to shape costs.

In that environment, the businesses best placed to navigate the months ahead will be those that act early, review their energy strategy to reduce waste and reduce reliance on improve energy independence, taking control where they can. Because while the market cannot be controlled, exposure to it can be managed.