Reeves Backs North Sea Drilling as Iran War Rattles Markets and Tests Cabinet Unity

Chancellor Rachel Reeves has publicly declared her support for expanded North Sea oil and gas extraction, describing herself as “very happy” to see drilling proceed at two proposed new fields, citing the economic benefits of job creation and tax revenue. The intervention places her in direct conflict with Energy Secretary Ed Miliband, who has maintained a firm stance against new fossil fuel exploration in British waters, setting up one of the most significant cabinet tensions in the Starmer Government to date.

The Rosebank oil field and Jackdaw gas field sit at the centre of the disagreement. Licensing decisions for both fields rest with Mr Miliband, who has resisted mounting pressure to expand domestic extraction. Ms Reeves, however, has argued that Britain must take greater control of its own energy supplies, pointing to the disruption caused by the ongoing war in Iran as evidence that dependence on international energy markets carries substantial economic risk. The Chancellor noted that the courts had overturned licences previously granted by the previous Conservative Government, and that the current administration had been required to restart the approval process through lawful means. Field operators have indicated that production could commence within months of licence approval, though Mr Miliband has introduced further procedural delays by requesting additional information from operators in recent weeks.

The SNP has also shifted its position in the wake of the conflict. Scottish First Minister John Swinney said new North Sea fields should be permitted, provided the oil and gas produced carried a lower carbon footprint than imported alternatives, representing a notable reversal of the party’s previous opposition to further extraction. The Conservative Party launched a “Get Britain Drilling” campaign this week, and Reform UK has similarly called for new North Sea exploration. Business figures including Octopus Energy chief executive Greg Jackson and British Gas chief Chris O’Shea have added their voices to the chorus, with Mr O’Shea stating that expanded domestic production “will bring prices down.” Donald Trump also urged Britain to “get your own oil” earlier in the week.

Ms Reeves moved to dismiss suggestions that the Treasury was benefiting from a windfall as a result of surging energy prices. Responding to analysis indicating the Government could collect an additional GBP 8 billion should fuel prices remain at current levels for the next twelve months, the Chancellor described the notion as “for the birds.” She argued that government borrowing costs had risen sharply since the start of the conflict, and that income tax and capital gains tax receipts were likely to fall, more than offsetting any revenue gains from elevated commodity prices.

Financial markets responded sharply to signals from Washington that the Iran war could be drawing to a close. Donald Trump said the United States would be “leaving very soon,” adding that the conflict could end within “two to three weeks.” The FTSE 100 recorded its best single-session performance in nearly a year, closing 1.7 per cent higher on Wednesday, its steepest gain since April 2025. The mid-cap FTSE 250 rose 2.28 per cent, reflecting improved sentiment on domestically focused UK equities. Defence stocks led the advances, with Rolls-Royce climbing 6.5 per cent and Babcock rising 6.3 per cent following Mr Trump’s separate comments to The Telegraph indicating he was strongly considering withdrawing the United States from Nato. HSBC was the largest upward contributor to the FTSE 100, gaining 4.3 per cent.

On Wall Street, the S&P 500 rose more than 1 per cent during morning trading, while the Nasdaq-100 gained close to 1.6 per cent and the Dow Jones Industrial Average advanced by approximately 1 per cent. These moves followed Tuesday’s session, during which the S&P 500 surged 2.9 per cent for its strongest daily gain since May 2025. Asian markets posted more dramatic rebounds overnight, with South Korea’s Kospi surging more than 8 per cent and Japan’s Nikkei 225 rising approximately 4.5 per cent. European benchmarks also advanced, with the Stoxx 600 up 2.3 per cent and Germany’s Dax gaining 2.5 per cent.

Energy stocks moved in the opposite direction to the broader market, as the prospect of an earlier end to the conflict weighed on oil-linked equities. Shell fell more than 4 per cent on Wednesday, its sharpest single-session decline in a year, following a remarkable 16.6 per cent rally in the preceding month driven by war-related energy price spikes. BP declined more sharply, falling 5.3 per cent. Brent crude fell nearly 3 per cent on optimism over a potential ceasefire, though oil remained above USD 101 a barrel. Wholesale European natural gas, measured by the Dutch TTF benchmark, dropped 5.5 per cent on Wednesday to below EUR 48 per megawatt hour, extending a two-day decline of approximately 13 per cent.

Mr Trump confirmed that he would only consider a ceasefire if the Strait of Hormuz was “open, free and clear,” a condition that analysts caution could be difficult to satisfy quickly. The waterway has been effectively closed since the start of the conflict, cutting off approximately a fifth of global oil and gas exports. Analysts at UBS cautioned that even if the conflict concluded, “a resumption of energy flows may take longer still,” with supply chain experts estimating that a full normalisation of commodity flows through the strait could take between three and six months.

Economists at Capital Economics warned that the economic effects of the war would persist beyond any ceasefire. Analyst Thomas Mathews noted that energy prices would “probably remain high” even in a swift resolution scenario, keeping major central banks from cutting interest rates and preventing equity indices from immediately recovering their pre-war levels. The Bank of England, meanwhile, has warned that Britain faces a heightened risk of a financial crisis as a direct consequence of the conflict. The central bank said the war had already left an additional one million people facing higher mortgage repayments, bringing the total number of mortgaged homeowners facing elevated payments by 2028 to approximately 5.2 million, up from 3.9 million before hostilities began.

Bank of England Governor Andrew Bailey pushed back against market bets that the Bank would raise interest rates twice this year, stating that policymakers must weigh risks to growth and employment alongside inflationary pressures. Money markets had priced in as many as four rate rises earlier in the conflict; current expectations have since moderated to approximately two. The Bank held rates at 3.75 per cent at its most recent meeting. Mr Bailey said the market was “getting ahead of themselves” in pricing in additional tightening.

The Ryanair chief executive, Michael O’Leary, warned that up to a quarter of the airline’s jet fuel supplies could be at risk by May and June if the conflict continues. He noted that oil prices had more than doubled since the war began in late February, and said the aviation industry was grappling with a “dramatic” escalation in costs. Mr O’Leary said Ryanair was “reasonably well-hedged” with roughly 80 per cent of its fuel locked in at pre-war prices through to March of next year, though the remaining 20 per cent had approximately doubled in cost. Thousands of flights globally have been cancelled in recent weeks due to surging fuel prices and closures at key regional travel hubs.

British business confidence fell to a record low in March, according to the Institute of Directors, with its Economic Confidence Index declining to a reading of -76, down from -63 the previous month. This marks the lowest level ever recorded, surpassing even the anxiety recorded ahead of the second Autumn Budget last year. Fifty-nine per cent of companies surveyed reported a negative impact from the war, rising to 69 per cent among manufacturers. The IoD’s chief economist Anna Leach identified sharp increases in fuel and shipping costs, rising petrochemical material prices, and delivery delays as the primary sources of disruption, while warning that investment decisions were being delayed and financing had become more difficult to secure.

The S&P Global UK Manufacturing PMI confirmed that factory output fell for the first time in six months in March. Delivery times lengthened at the steepest rate since mid-2022, when global supply chains were still adjusting to the shock of Russia’s invasion of Ukraine. Factory input price inflation accelerated at its sharpest pace since the aftermath of the UK’s 1992 exit from the European Exchange Rate Mechanism.

Germany’s leading economic research institutes cut their GDP growth forecast for 2026 to 0.6 per cent, down from 1.3 per cent, with 2027 growth also revised downward. Australian Prime Minister Anthony Albanese addressed the nation, warning that the economic shocks from the Middle East war would persist for months and urging citizens to switch to public transport and limit discretionary fuel use. Emmanuel Macron, meanwhile, travelled to Tokyo for talks with Japanese Prime Minister Sanae Takaichi, with both leaders agreeing to cooperate on measures to reopen the Strait of Hormuz.

On the diplomatic front, Prime Minister Sir Keir Starmer used a Downing Street press conference to announce that Foreign Secretary Yvette Cooper would host a gathering of 35 nations to assess diplomatic and political options for restoring freedom of navigation through the Strait of Hormuz. He framed closer alignment with the European Union as a strategic imperative, arguing that “Brexit did deep damage to our economy” and that Britain’s long-term national interest required a deeper partnership with Europe. He stopped short of committing to rejoin the single market or customs union, though he indicated ambition to extend economic co-operation beyond existing frameworks at the upcoming UK-EU summit. Sterling rose 0.2 per cent against the euro and 0.6 per cent against the dollar following his remarks. The pound’s gains against the dollar were also supported by the broader weakening of the US currency as investors unwound safe-haven positions in response to the ceasefire signals.

Mr Starmer’s push for EU realignment drew criticism from across the political spectrum. Conservative shadow foreign secretary Dame Priti Patel accused the Prime Minister of seeking to “reopen the old wounds of the Brexit years” rather than addressing the Government’s domestic failings. Reform UK deputy leader Richard Tice described the proposal as “absurd,” characterising the EU as a “failing economic bloc” with a poor record on defence investment. Robert Jenrick, Reform UK’s economy spokesman, called on the Government to scrap the planned September fuel duty increase as an immediate response to the cost of living squeeze. Ms Reeves declined to commit to cutting fuel duty or VAT on petrol, stating that she had to be “careful” given the inflationary risks such a move could create.

The Chancellor also confirmed that household energy bill support from July would be means-tested, based on household income rather than provided universally. She cited the lessons of the Government’s response to the Russia-Ukraine energy shock, during which she argued the wealthiest third of households received a disproportionate share of support. Average annual household energy bills currently stand at GBP 1,641 under the Ofgem price cap covering April to June; a sharp upward revision to the cap from July is widely expected.