How are UK firms responding to the ongoing oil supply disruptions?

The start of the conflict in the Middle East at the end of February, and the disruption to shipping through the Strait of Hormuz that followed, pushed global oil prices sharply higher: Brent crude rose from around $72 per barrel just before the war to nearly $120 per barrel at its pre-ceasefire peak in March, the highest level since 2022. Prices fell back over the spring, returning close to pre-war levels by late June as shipping resumed. But prices climbed again in July, as renewed hostilities and a reinstated blockade unsettled the Strait once more. The episode has drawn repeated comparisons with the energy crisis in 2022 caused by the Russia–Ukraine war, which led to widespread government financial support for households and businesses costing around £44 billion. Each flare-up of the current conflict has renewed calls for government help with energy costs.

Until now, evidence on how firms are coping with the current shock has relied on self-reported expectations. This Comment presents the first estimates of how firms have been affected by the shock and how they have responded. In a newly updated working paper, we compare businesses that use energy intensively with otherwise similar businesses that do not, drawing on the Office for National Statistics (ONS)’s fortnightly business survey (the Business Insights and Conditions Survey, or BICS for short). Our approach, initially developed to study the 2022 energy crisis, delivers estimates of effects on firms within two months of the events themselves. For the 2022 crisis, we have validated it against the UK’s slow-moving, high-quality structural business survey (the Annual Business Survey), as well as the Bank of England’s own rapid-response survey (the Decision Maker Panel, or DMP for short).

We emphasise three findings. First, in the first two months of the crisis, the cost increases in the current energy shock have been concentrated in a narrower set of industries than in 2022. Second, exposed firms have so far responded mainly by raising prices and passing through their cost increases. Third, we do not yet see the signs of financial distress among more-exposed firms that emerged over the course of the 2022 crisis.

A narrower shock than in 2022

The 2022 crisis was mainly a gas crisis: wholesale gas prices quadrupled within months and fluctuated around that level for over a year, and because gas and electricity account for a large share of energy expenses in almost every industry, firms across the whole economy felt the pressure. Current disruption mainly affects oil prices (and far fewer businesses use oil directly), and a fragile ceasefire followed within weeks of the conflict. Together, these two factors mean that, on average, UK firms have felt this shock less than the previous one.

Our data confirm this intuition. In 2022, the estimated input cost increases for more energy-intensive firms varied enormously across industries, with a long tail of heavily affected sectors such as the manufacture of basic metals. In 2026, these industry-specific input cost effects caused by rising energy prices generally cluster more tightly around the whole economy-wide average effect: this implies that in most industries, more energy-intensive firms see less of a change in input costs, even as a small group of industries in the upper tail of the distribution bears most of the pressure. The industries most affected this time are also largely different from the ones affected by the 2022 crisis: the correlation between industry-level cost effects across the two shocks is just 0.15, consistent with oil exposure and gas exposure being quite different things.

Firms have responded on prices but less on forward-looking margins

Firms can adjust to higher costs along many margins at once – for instance, by raising prices, changing inventories, altering investment plans, drawing on cash reserves or taking on debt. Figure 1 compares average responses along the margins we can observe in the BICS data across the two shocks, over the first two months of each crisis.

Figure 1. Average effects of the 2022 gas shock and the 2026 oil shock across key adjustment margins

_{Note: Each row represents a different adjustment margin. Markers represent average estimated treatment effects of energy intensity on each margin, comparing the 2021–22 Ukraine gas shock (in purple) over a matched December 2021 to February 2022 window with the 2026 shock (in green) over early March to late April 2026. Whiskered lines indicate 95% confidence intervals.}

_{Source: Authors’ calculations using ONS Business Insights and Conditions Survey and Annual Purchases Survey data via the Secure Research Service.}

Prices respond in both episodes and to a similar degree: firms with higher pre-crisis energy input shares report greater input cost increases and are significantly more likely than other, similar (but less exposed) firms to increase their own output prices, thus passing through some of their cost increases to customers. Because responses in the BICS are directional (that is, firms report whether they raised their prices, lowered them or held them constant), we cannot say exactly how much of the cost increase they have passed through. Contrary to 2022, when the estimated likelihood of pass-through into prices of small and medium enterprises (SMEs) was roughly twice that of larger firms, in 2026 large and small firms are equally likely to be passing through input price increases.

However, the forward-looking margins (or expectations) that moved during the gas crisis have been stable so far. In 2022, exposed firms came to expect higher input prices ahead; large firms which had the financial resources to do so thus increased their capital spending to adjust their production processes as the shock persisted. Two months into the current shock, we have not seen changes on either of these margins. Instead, exposed firms have built up inventories, consistent with precautionary buying while supply routes through the Gulf remained uncertain. Together, these responses suggest that, at least in the initial two months of the current crisis, firms have treated the current oil disruption as more temporary than the more persistent 2022 gas crisis.

Our findings are consistent with research in the Bank of England’s recent Monetary Policy Report, based on data from the DMP, which finds that firms report passing on some of the cost increases due to higher oil prices while absorbing the remainder into their profit margins.

Sectors where turnover has risen are largely sectors where prices have risen too

One result looks, at first sight, like resilience to the shock: more-exposed firms report higher turnover since the disruption began. Figure 2 shows why that reading would be too quick. Across broad industries, turnover responses and output price responses are positively correlated: that is, the higher cash-terms turnover is likely due to the higher prices firms charge rather than a sign of higher sales volumes. Turnover expectations, meanwhile, have barely moved.

Figure 2. Sector-level average price and turnover effects for the 2026 oil shock

_{Note: Each point is a broad (sector-level) industry. The horizontal axis shows the estimated effect of energy intensity on turnover and the vertical axis shows the estimated effect on the price of goods sold, both for the 2026 shock.}

_{Source: Authors’ calculations using ONS Business Insights and Conditions Survey and Annual Purchases Survey data via the Secure Research Service.}

This finding has two implications for policymakers as the situation in the Gulf develops over the next few months. First, because firms pass through price increases, nominal turnover might mask some real reductions in output by affected firms. This matters for how we read the economic data over the coming months. Second, inflation is likely the main channel through which the shock will affect consumers and the wider economy.

No sign of wider distress yet, but it is still early

So far, we have not seen signs of widespread financial distress among more-exposed firms across the economy. Our estimated effects of the 2026 shock on distress-relevant margins, such as the perceived risk of insolvency and how long firms’ cash reserves will last, are close to zero. The same is true of other forward-looking margins such as capital spending. On the evidence to date, in the initial months of the crisis the oil supply disruption has therefore raised costs and prices with few direct implications yet for the wider real economy, at least in terms of firms’ input and financial choices.

Depending on whether the current ceasefire holds, and how quickly shipping lanes fully reopen, this may of course change. In the 2022 crisis, exposed firms’ confidence in meeting their debt obligations and their repayment burdens deteriorated over the months that followed the initial price spike, and exits eventually rose among the smallest exposed firms, even though employment did not fall on average. Just because we have not seen changes from two months of data following the 2026 shock, it does not mean there will not be strain on firms later this year, particularly if disruption resumes.

Implications for measurement and policy

Our findings highlight three considerations for policymakers. First, because the current cost increases are so concentrated, broad-based business support would mostly go to firms that have barely been affected. That strengthens the case for targeting of any business support. But targeting requires identifying exposed firms quickly, via real-time monitoring of the kind we introduce here. Second, firms hit by the current shock are generally not the same as those that were most exposed to the 2022 gas shock. This is in one sense reassuring: the firms now under pressure are largely not the ones whose cash buffers and balance sheets were already eroded in 2022. Third, so far, exposed firms have mostly responded by raising prices but have not yet adjusted their capital or balance sheets. This is consistent with research by the Bank of England, which likewise finds some evidence of pass-through into prices but no significant adjustments on other dimensions, with firms absorbing the remainder of the cost shock into their profit margins. If policymakers are concerned about job losses or firm exits, these other dimensions – notably, indicators of indebtedness and firms’ ability to meet payments – are the ones to monitor closely in the next few months.

Real-time estimates of firm responses can be powerful tools in tailoring policy responses. In future work, we will build on these estimates in three ways. First, we will measure exposure to the 2026 shock more precisely, tailoring our analysis to take into account a firm’s detailed fuel mix. Second, we currently only capture firms’ direct energy costs but not the energy embodied in the inputs they buy from others, which matters more for a shock transmitted along supply chains. Future work will incorporate firms’ indirect exposure too. And third, we currently observe only data up until the end of April. The pass-through into consumer prices, and the slower-moving effects on investment, debt and firm survival, will take longer to appear in the data. Future updates will show to what extent they materialise.

Further information

Estimated effects by industry, firm size and adjustment margin from the 2022 gas crisis can be interactively explored at https://firmnarratives.trfetzer.com/. For more on the implications of the ongoing oil disruption, see https://ifs.org.uk/articles/what-does-war-middle-east-mean-energy-prices-and-how-could-government-respond. The views expressed here are those of the authors, and not necessarily those of the Bank of England or its committees.