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 12^th 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.”