Just as UK inflation was coming under control and with energy bills set to ease in April, conflict in the Middle East has turned the summer outlook on its head. While only a small share of the UK’s oil and gas passes through the Strait of Hormuz - representing around 1% of gas supply, and around 10% of oil supply -  we are once again exposed to a global fossil fuel price shock.

A familiar vulnerability in a changing world

Four years ago, I led the team working on the government’s response to the gas security crisis triggered by Russia’s invasion of Ukraine and the national experience I’m now seeing is  broadly the same as it was four years ago. The UK finds itself at the mercy of geopolitical events far beyond its control, with no clear end in sight. Oil and gas prices respond in real time, edging upwards with each escalation. And households are left fearing the worst in the form of higher energy bills and cost of living increases.

This second major fossil fuel price shock in four years is significant. It is a manifestation of the fact that we are living in an increasingly globalised yet polarised world in which nation states are competing for power and influence. Geopolitical conflict and tensions are an inevitable consequence and precipitate price shocks and volatility. When you also consider the other price spikes that have occurred in the last twenty years – the 2008 oil supply crunch, the oil price plateau in the early 2010s and the 2021 Covid recovery price spike, the picture is even bleaker.

Past trends suggest that even beyond this current crisis, further fossil fuel price shocks are not just possible but plausible within the next few years. The question, then, is whether government should more explicitly treat this as an active near-term risk in energy policy design and make changes now.

A long-term strategy with short-term limits?

There is already a clear strategic direction. The current situation has reinforced the view that the UK’s dependence on imported fossil fuels is not in the national economic interest, and that accelerating the deployment of clean, home-grown energy is the right long-term response. Producing more home-grown oil and gas is not the answer because prices are set on the international market and there is not enough supply available in the UK continental shelf (which is a mature basin) to make a difference to price.  Yet this strategy to accelerate deployment of renewable energy has not translated into lower energy prices for consumers. One reason is structural: gas-fired generation continues to set the electricity price around 85% of the time.

Most market analysis points to the early 2030s as the point at which a renewables-heavy system begins to materially reduce bills. That raises a more immediate question. If the benefits of the transition are still several years away, is there a case for acting sooner to limit the influence of gas on electricity pricing?

Proposals such as placing gas plants into a strategic reserve - removing them from the wholesale market except when needed - are now part of the debate. Seen through the lens of global market risks, both now and in the future, perhaps it is time for a rethink on pricing.

From reactive support to pre-emptive protection?

Alongside this sits a second, more immediate pressure. On Tuesday, the Chancellor, Rachel Reeves, reiterated that any future support for rising bills would be more targeted, in contrast to the blanket support measures seen in 2022–2023 which totalled £36 billion. At the same time, Ofgem data shows consumer energy debt has risen sharply - from £1.8 billion in 2022 to £4.4 billion today.

This creates a tension in the current approach. If pricing remains unchanged, government is likely to return repeatedly to targeted support each time a price shock occurs. An alternative is to act more pre-emptively.

The case for a social tariff which offers discounted energy to low-income households, has gained traction in this context. Designed well, it could target support based on both income and energy use, scale assistance with consumption, and focus help on those most exposed to volatile prices.

When responding to the current spike in energy prices, the challenge for government is to consider whether more proactive policy redesign is needed now, both to reduce the influence of gas on electricity pricing and to better protect those most exposed to volatility. Acting earlier would not eliminate risk but could lessen its impact and avoid repeating the cycle of emergency intervention seen in recent years.

If your organisation is navigating the evolving political or energy landscape, we can help. Reach out to our Public Affairs team at: publicaffairs@cardewgroup.com.