However, that understates the import of her promotion. Energy will be a vital component of Andy Burnham’s premiership. Net Zero has become a defining element of Labour’s offering. Consumers and businesses desperately want energy bills to come down.

Meanwhile, Fahnbulleh is anything but an underling. A child refugee from war-torn Liberia, she made her way to Oxford and proceeded to a doctorate at the London School of Economics. Here, she established her bona fides as a scholar with well-elaborated and nuanced academic publications on industrial policy and the climate crisis. Moreover, her strong vision for localism, rooted in the cooperative tradition, has earned her the moniker of Burnham’s brain. It’s therefore safe to say she assumes her position with both authority and clout.

That’s all for the better, because she will immediately face two big decisions: how to bring down energy bills about which consumers and businesses alike have been screaming; and how to reconcile that imperative with her commitment to Net Zero and the phasing-out of fossil fuels at a time of extreme volatility, when a rebel group in Yemen can push the price of oil to over $100 a barrel .

Suggested reading

Burnham vs the bond markets

By John Rapley

To a considerable degree, this task comes down to balancing short-term with long-term goals, and strategy with tactics. In the short term, scrapping green levies and allowing for further exploration of Britain’s oil and gas reserves in the North Sea, as called for by both Reform and Conservative parties, would appear to be an obvious win: not only could the measures create jobs, advocates argue, but they would reduce energy bills and allow the country to substitute cheap, local gas for imports.

However, such benefits would be largely short-term, while the gains can be exaggerated. In the first place, it isn’t renewable energy that is driving up British electricity bills — it is the pricing model and the high cost of natural gas (a price which is itself set on international markets). Indeed, the most effective way to bring down bills in the long term would be to double down on renewables and completely eliminate gas from the energy system. As for green levies, these make up only a small share of total electricity bills, and in any case, the programs these levies fund, such as the Warm Home Discount for vulnerable households, would otherwise have to be paid for through general taxation. Distribution costs count for more, and one of the reasons electricity bills are rising so fast is that infrastructure must be upgraded to deal with increasingly severe weather events, itself a product of the climate change caused by carbon emissions.

Meanwhile, as an investment proposition, the fossil industry’s benefits are immediate, but possibly no more than that. Oil companies pay large dividends — but that’s because it’s an industry which appears to have a finite life and so their capital expenditure tends to fall below that of growth industries. This, indeed, has been a source of Donald Trump’s frustration with the sector: he wants the companies to drill, baby, drill to bring down prices, and they understandably reply: why bother? We’re happy to keep supply limited and make money off higher prices while the good times last.

Most of the future growth in demand for energy will come from the developing world, much of which is leading the way in the transition away from fossil fuels. Developing countries are not necessarily pursuing this path out of concern for climate change. What is driving this is instead energy security — that is, the eminently practical consideration that renewable energy relies on entirely local resources. Countries with abundant renewable energy reserves are not so vulnerable to foreign suppliers or the vagaries of the market — let alone price shocks like the recent interruption caused by the Middle East war. When the price of your input can leap in a week or its supply can suddenly get cut, as we’re seeing  now in both the Strait of Hormuz and the Red Sea, the attraction of relying on home-grown energy only grows stronger.

Meanwhile, renewable energy has turned out to be one of the most dynamic sectors of the UK economy, with a vibrant startup ecosystem that is riding on the back of Government policies and growing much faster than the overall economy. Investment in the sector has grown 20 times over in just the last decade and London is now Europe’s leading climate-tech hub. To roll back Net Zero would be to cripple a sector that could potentially be at the vanguard of a new industrial revolution — a spectacular economic own goal.

So, when it comes to industrial policy, which both Burnham and Fahnbulleh favor, there is much to commend Net Zero. In principle, it might be possible to partially reconcile the competing demands by allowing an expansion of oil and gas production — the windfall tax may come in for reconsideration — and then using the Government’s share of the revenues to support the energy transition. (This is the approach used by Norway and some of the Gulf states). But long-term, it makes sense for the Government to put its eggs in the basket of this rising sector rather than a legacy industry.

However, this is where the real challenge to the country’s energy policy will lie — namely, does the Government have any eggs to play with? Burnham has entered Downing Street with the same set of fiscal constraints that felled his predecessor, and there is little reason to expect those to ease much. Burnham has said that while he might look for a little flexibility, he will abide by the same fiscal rules Rachel Reeves had set for herself.

In truth, he doesn’t have much choice: if he doesn’t bind John Healey, the new Chancellor, this way, the bond market will do it for him. And while investors have greeted Healey favorably, with gilts moving in line with the bonds of Britain’s G7 partners, those rates have been rising across the board, and look set to keep doing so.

Meanwhile, given that Healey resigned from the Starmer government over its failure to adequately fund the country’s defense budget, it’s a safe bet that doing so was a condition for his taking his new job. So, in addition to having to find more money to pay rising debt costs, Burnham will need to find more money to pay for defense spending.

And yet for all that urgency, he has further tied his hands by making it impossible, at least for now, to tackle the one Government bill that everyone agrees has got out of control: welfare spending. Burnham campaigned on the pledge not to scrap the triple-lock that is the principal driver of that portfolio’s ever-rising price tag. As a result, we saw how tricky he made his task the moment he crossed the threshold of No. 10. The Prime Minister announced he would eliminate VAT on energy bills and fund it from the savings he’d make by scrapping the digital ID scheme, only to have a former minister point out that scheme was unfunded.

If Burnham is to proceed with his ambitious plans to remake Britain and shift the economy to renewable energy, effecting a new industrial revolution in the process, he will therefore need to make some very tough choices, lest he end up making lots of promises that his Chancellor nixes. Since the Labour manifesto did not ask for a mandate for such hard choices, he may have to secure one of his own.

But that poses a rather large dilemma. To secure his own mandate, Burnham would need to call an election, something for which there appears to be little appetite among either the public at large or his own backbenchers, many of whom would probably lose their jobs, given the scale of Labour’s current majority. But to make the sort of bold decisions that might underpin his attempt at national renewal — such as serious welfare reform, raising income taxes or reintegrating with Europe — Burnham would effectively have to tear up the manifesto Labour campaigned on.

On the upside, he comes to office with some advantages over his predecessor. He is, obviously, a more gifted communicator, and he also has a clearer message to deliver — a more fully-formed vision of government based on devolution, local action, and a constructive state presence in daily life. He also takes power with an evident plan to make government more effective, placing more power in the Cabinet Office rather than maintaining Starmer’s approach of relinquishing decision-making authority to a Chancellor who often gave the impression of looking at a computer spreadsheet before reciting “Treasury says no”.

Suggested reading

Trump is bombing the global economy

By John Rapley

But he’ll need all these skills and powers, because his task isn’t enviable. He is shackled with the albatross that sank the Starmer premiership, bequeathed to him by Starmer and Reeves — a set of fiscal constraints, resulting from careless election pledges, which still make it impossible to do anything more than incremental tinkering — like ostensibly temporary VAT cuts, or £2 bus fares. His new energy secretary has the potential to assist him in his goal of transforming Britain — but only if he can figure how to pay for it.

He must therefore find a way to offload the weight of his inherited burden. If he doesn’t, he will join the lengthening list of short-term premiers that Britain has begun compiling.

Since then, the White House jawboned the oil price down further with claims that the Iranians were talking and a ceasefire was on the table. Yet for all the chatter, the basic picture hasn’t changed: the war continues, the Strait of Hormuz remains effectively closed and oil prices are 50% higher than they were when the year began. While Iran has said that it will allow the ships of non-hostile countries to pass through the Strait in return for a few million dollars, it hasn’t made clear which those countries are — meaning it retains effective control over the flow of oil and goods from the region.

If the ceasefire talk turns out to be just talk then the oil price is likely to surge once more. But even before that, each day the Strait remains under Iran’s control and the bombing continues, the world economy gets pushed ever closer to the abyss. For each day that this situation persists, it will take several more days — and possibly weeks — for the world economy to fully reopen, because damage is getting locked in that will take proportionately longer to repair. 

Some estimates suggest that even if Trump’s more optimistic pronouncements are right and war ends today, it will take at least four months to return to normal. Gas plants that are destroyed now will take months or more to fully restore. Supply chains that have been disrupted, and shipping backlogs that have accumulated, could take up to a year to clear, while undersupplied energy markets will also take months to be restocked. 

The longer the war goes on, the worse all this gets. And with the US sending more troops to the region, Iran and Israel still trading fire, and now Lebanon in flames too, there is little sign of an end to the fighting. Even the American proposal, already rejected by Iran, is supposedly just for a 30-day pause while a final agreement is hammered out. And for all the effort in Washington this week to ease the anxiety in markets, so far there’s been little evidence of an increase in transit across the Strait: as of Tuesday, the number of ships passing through each day was still less than 5% of the pre-war average. Whatever the mood music in the markets, then, the physical shortages continue accumulating daily which suggests that should a ceasefire not materialize, the rise in prices could be brutal.

Given these shortages, inflation is headed upwards. Futures traders don’t currently expect oil prices to return to where they were at the start of 2026 for several years. In part, that’s because there’s little expectation of a return to the status quo ante in the Strait of Hormuz, even with peace. Iran has shown it can control the Strait, and absent the installation of a friendly regime in Tehran, traders will likely attach a risk premium to an export tap that can now be shut off at any time.

More from this author

Why the West is getting poorer

By John Rapley

Moreover, the pain of higher prices spreads beyond energy to other products and services whose supply is affected by the war. In particular, food prices are going to rise because of a fertilizer shortage from the Gulf, which will hit just as the northern planting season begins. That will inevitably reduce this year’s crop yields. Though the pain will be most acute in countries like Sudan and Somalia, which rely heavily on fertilizer from the Gulf and where food insecurity is already a problem, it will be felt everywhere. In Britain, the National Farmers’ Union is predicting we may start to see increased prices on cucumbers and tomatoes as soon as next month. Aluminum prices are also rising, which could feed into the cost of a range of manufactured goods, from cars to beer cans. And the shortages building up via wartime backlogs will put upward pressure on prices for a while, as happened after the pandemic.

Reflecting this, interest rates on government debt have risen sharply. In part, this reflects a growing expectation that central banks will hold off cutting interest rates, and indeed may even raise them, to ward off inflation. But in part too it probably reflects a growing hesitancy about lending to governments whose fiscal accounts show no sign of coming under control. The US national debt, already approaching $40 trillion — about 124% of GDP — suddenly looks set to get $200 billion bigger as the Pentagon seeks a top-up of its rapidly-depleting weapons stockpile.

Rising interest rates, in turn, will force budget cuts elsewhere, not just for governments, but for cash-strapped consumers and businesses. One alternative, of course, is more borrowing. But that could potentially produce a vicious upwards spiral in interest rates. The resulting decline in investment could then be exacerbated by a contraction of global liquidity. Why? Because the Gulf states, which have been investing a lot of their surpluses abroad, may now have to close their purses to foreigners to focus on rebuilding at home.

Stock markets are anticipating all this, with indexes down across most of the world (though interestingly, many developing countries are still holding up). In the US, where over half the population invests in the stock market, this could create a negative wealth effect that restrains consumption at the top end of the income spectrum, tipping the economy further toward recession. On the prediction markets, the odds of the economy falling into recession, rising by the day, have now reached one in three.

Sluggish or falling stock prices could also generate strains in some of the more opaque corners of the market, such as private equity, where the lack of exit options for firms has led investors to start demanding back their money — only to be rebuffed. It’s therefore possible that the worst is yet to come for asset markets.

This raises another worrying possibility. It may emerge that Donald Trump’s improv theater of war —  which has already raised uncomfortable questions about whether its purpose is to move markets for the advantage of insiders — doesn’t reflect anything other than the whims of the president and his short-termist entourage. The madman theory of international negotiations, once associated with Richard Nixon, presumes a rational actor who persuades others of his folly to extract concessions; what it doesn’t anticipate is a genuine madman, or merely someone who doesn’t have a complete handle on his policy briefs.

So far investors, and some political analysts, have opted to believe that there is a method behind Trump’s apparent madness — for instance that the closure of the Strait of Hormuz actually serves his strategy of establishing global energy dominance at the expense of China. Of course, this thesis doesn’t really square with the fact that the shares of Chinese battery makers have risen more than those of US oil firms since the war began, while volatility in oil and gas markets seems likely to accelerate the world’s transition away from fossil fuels, an outcome that would be beneficial to China.

If, then, investors begin to doubt that the President has an actual plan and is merely fumbling his way toward improvised, temporary and sub-optimal solutions, a new risk premium may get attached to US securities. This could lower their value yet further on world markets. Investors dare not entertain that possibility yet. Should that ever change, though, the turn in US markets could be sharper than expected.

But even assuming that Trump is a rational, calculating operator, a fundamental problem remains: the two sides to this negotiation appear to be approaching risk in entirely different ways. Trump’s approach to negotiation and combat is based on arithmetic. It assumes that whoever has the resources to do the most damage has the upper hand — and will therefore win. 

However, humans only sometimes make decisions in this way. More often, they use calculus, or indeed no mathematical reasoning at all. For many people, there really are things you can’t put a price on. For the Iranian regime, submitting to Trump’s latest demands — for instance suspending their ballistic missile program — would amount to the end of the Islamic Republic. Little wonder, then, that they’d sooner die than give in. And if there are opportunists in the ranks of the Revolutionary Guards, willing to be bought off in some Venezuela-style putsch, disloyalty doesn’t seem common in the high command. Again, that’s hardly surprising: as a group, the Guards are deeply ideological and committed to the regime’s survival at all costs. 

Despite Donald Trump’s cratering poll numbers, one thing that can be said is that Americans who voted for him knew what they were getting. He might have said he would stay out of forever wars, but the way he makes and implements decisions was always well known. If he somehow pulls a rabbit of triumph out of the Middle Eastern hat, his followers will be vindicated in their judgment. If he fails, they have to take their share of the blame.

As for Iran, even if an agreement is cobbled together in the short-term, the Islamic Republic looks set to persist with what Israel calls the “Samson strategy” — even if that means bringing the house down with everyone in it. If that makes them the true madmen, it’s at least madness based on rational calculation. The US’s pain threshold is likely to be met earlier than that — and the only question is whether Trump postpones that surrender until the damage done to the world economy makes a rebound this year impossible.

The horrific game of chicken being played in the Middle East will only end either when Iran goes over the cliff — or when the US slams the brakes. The first doesn’t appear imminent and the second is impossible to predict. In the meantime, we therefore seem stuck in an escalation loop which will only end when the damage becomes very severe. Until then, the war drags on, and the world edges closer to the abyss.