What does the war in the
Middle East mean for energy prices, and how could the government
respond?
The Middle East conflict has pushed up wholesale gas prices by
67% and oil prices by 35% between 28th February and
12th March. At this stage, the shock to gas prices
remains significantly smaller than during the 2022–23 energy
crisis, while oil prices are at similar levels. However, with
household energy bills already 14% higher in real terms than
before the Ukraine war, there are already calls for the
government to intervene to shield households. This comes at a
time when the public finances are under significant strain and
would be made weaker if we see higher inflation and interest
rates resulting from a sustained increased in energy prices.
If the government chooses to intervene, a central question will
be how to design any support package. Broad subsidies that reduce
energy prices and/or are given to all households are costly -
during the last crisis, every £1 households spent on energy cost
the government 40p. Blanket support through reducing energy
prices also weakens the incentive to curb energy use in response
to lower supply. More targeted support would be cheaper, but
without investment in linking data on energy use and incomes, it
would be difficult to ensure help reaches some of the most
vulnerable households. With time before next winter, investing
now in better data to enable targeting could deliver substantial
savings.
Bobbie Upton, Research Economist at the IFS and an author
of the briefing, said:
“The current energy price shock is, so far, considerably smaller
than what we saw following Russia's invasion of Ukraine, but the
government finds itself in a less favourable starting position.
If prices keep rising, the government will face some difficult
choices about whether – and how – to respond. Support for
households and businesses would help insure them against
temporarily higher prices, but a repeat of the blanket support of
2022 would blunt incentives to reduce energy use when supplies
are scarce. It would also put real strain on the already-fragile
public finances. Targeted support, backed by investments in
better data, could deliver help to those who need it most at
significantly lower cost to the taxpayer. With some time
left before the next winter, now is the time to start
preparing.”
ENDS
Notes to Editor
What does the war in the Middle East mean for energy prices,
and how could the government respond? is an IFS
briefing by Peter Levell, Nick Ridpath and Bobbie Upton.
