What would $200 oil mean for Britain?

Approximately 20% of global oil supply — around 17 million barrels per day — transits the Strait of Hormuz. With the ongoing US–Iran conflict and the closure of the strait, we look into the unlikely scenario of $200 oil.

For the UK, the stakes are significant. Britain is a net oil importer in value terms — North Sea production covers only a fraction of domestic consumption — and a highly trade-exposed economy. A tripling of Brent crude from the OBR’s March 2026 baseline of ~$63/bbl to $200/bbl would hit the UK primarily through a household cost-of-living shock: energy bills, petrol, and the broader consumer price level would all surge, compressing real incomes and pulling down spending and output.

The Model

Using the Office for Budget Responsibility (OBR) macroeconomic model a series of simulations have been modelled running from 2026 Q2 to the end of President Trumps term 2029 Q1. This horizon reflects the view that the trajectory of the conflict is most likely to be resolved within the current US electoral cycle. This by no means intends to be a comprehensive accurate model of this scenario, but a potentially interesting simulation of the OBR model nonetheless.

The OBR’s macroeconomic model contains 372 simultaneous equations covering national accounts (GDP and its components), the labour market, prices and costs, public finances, and the balance of payments. The solver uses Gauss-Seidel iteration: in each quarter, it loops through all
372 equations repeatedly, updating each variable in turn, until the largest
proportional change falls below a convergence tolerance (indicating the
simultaneous system has reached an internally consistent solution).

Scenarios

Three oil price path scenarios are modelled through to 2029. First a permanent scenario with an immediate jump to $200/bbl in 2026 Q2 held through to 2029 Q1, this scenario simulating a sustained closure of the strait with no diplomatic resolution within the Trump term. Another scenario is simulated is based on a short-lived blockade resolved within 12 months, a temporary spike to $200/bbl for four quarters before reverting to the OBR baseline. The third and final scenario is a linear rise from ~$63 to $200/bbl over 8 quarters and holding through to 2029 Q1.

Scenario
Oil price path
Geopolitical analogue
Permanent
Immediate jump to $200/bbl in 2026 Q2; held through 2029 Q1
Sustained Hormuz closure with no diplomatic resolution within the Trump term
Temporary spike
$200/bbl for 4 quarters (2026 Q2 to 2027 Q1); reverts to OBR baseline from 2027 Q2
Short-lived blockade resolved by US military action or back-channel diplomacy within 12 months
Gradual ramp
Linear rise from ~$63 to $200/bbl over 8 quarters (2026 Q2 to 2028 Q1); holds at $200/bbl through 2029 Q1
Progressive tightening: escalating sanctions, insurance market withdrawal, accumulating shipping risk premium

Transition Mechanism of the shock

Transmission mechanism Oil price → GDP
01
PBRENT → UTCOST
Oil carries a 51.5% direct weight in the utilities cost index. A tripling of Brent crude produces a very large jump in energy and utility costs across the economy.
02
UTCOST → RPCOST
Higher utility costs feed into retail production costs (RPCOST) both directly (3.24% weight) and via services costs (59.96% weight), which also embed oil price terms. Both channels amplify the upstream shock.
03
RPCOST → CPIX
With retail margins held fixed, higher production costs pass directly into consumer prices excluding rent (CPIX). There is no margin absorption — the full cost increase hits the shelf price.
04
CPIX + CPIRENT → CPI
Headline CPI is a geometric aggregate of goods and services prices (CPIX) and rental costs (CPIRENT). Rents are less directly oil-sensitive, so aggregate CPI rises less than CPIX but still substantially.
05
CPI → PCE → RHHDI
Higher CPI raises the consumer expenditure deflator (PCE), which deflates nominal household incomes into real household disposable income (RHHDI). This is the core terms-of-trade loss for a net oil-importing economy.
06
RHHDI → CONS
Lower real incomes reduce consumer spending via the OBR model’s estimated consumption equation. The short-run income elasticity is 0.103, with a further long-run correction term. The effect compounds across quarters — each period of lost real income feeds into the next.
07
CONS → GDPM
Private consumption accounts for roughly 60% of UK GDP. Its sustained decline feeds directly into output loss. With investment and government spending held near baseline, consumption bears the full weight of the GDP contraction.

Results

The simulation produces large and sustained deviations from the OBR baseline across all three scenarios. The permanent shock is worst on every metric, followed by the gradual ramp, with the temporary spike least damaging — though even a four-quarter disruption leaves lasting scars well beyond the point at which oil reverts.

GDP falls 23.8% below baseline under the permanent scenario by 2029 Q1 (−£220bn), with the gradual ramp at −21.1% (−£196bn) and the temporary spike at −18.6% (−£172bn). The GDP loss continues to worsen after oil reverts in the temporary spike scenario, reflecting the error-correction dynamics of the consumption equation — accumulated income losses take time to unwind.

GDP impact — deviation from baseline (2029 Q1) % and £bn
Permanent −23.8% / −£220bn
Gradual ramp −21.1% / −£196bn
Temporary spike −18.6% / −£172bn
0% −12% −23.8%

Retail production costs (RPCOST) rise 26.9 index points above baseline under the permanent scenario by 2029 Q1, 23.5 for the gradual ramp, and 15.5 for the temporary spike. This is the upstream driver of the entire inflation shock: with retail margins held fixed, every index point increase passes directly into consumer prices.

CPI ends 24.9 index points above baseline under the permanent scenario — a price level shock, not a transient rate spike. The temporary spike peaks at 8.9 points before oil reverts, but does not return to baseline, ending at 14.3 points above it. Some cost pass-through is sticky.

Private consumption falls 34.5% below baseline under the permanent scenario (−£220bn), 30.7% under the gradual ramp, and 26.9% under the temporary spike. The consumption fall exceeds the GDP loss in proportional terms, reflecting that investment and government spending are relatively insulated — households bear the full weight of the adjustment.

Private consumption — peak deviation from baseline
Permanent
LOSS (£BN)
−£220bn
LOSS (%)
−34.5%
Sustained $200/bbl through 2029 Q1
Gradual ramp
LOSS (£BN)
−£195bn
LOSS (%)
−30.7%
Linear rise to $200/bbl over 8 quarters
Temporary spike
LOSS (£BN)
−£171bn
LOSS (%)
−26.9%
$200/bbl for 4 quarters; reverts mid-2027

Real household disposable income shows the largest deviation of any variable: −58.3% under the permanent scenario, −54.8% for the gradual ramp, and −46.4% for the temporary spike. These figures are upper bounds — fiscal support, wage adjustment, and monetary policy response are all absent from the model — but the direction is unambiguous.

Real household disposable income — squeeze vs baseline % deviation, 2029 Q1
BASELINE INCOME (100%)
OBR forecast
Permanent −58.3%
Income lost
Gradual ramp −54.8%
Income lost
Temporary spike −46.4%
Income lost
0% −30% −58.3%

Conclusion

The results illustrate, through a single transmission channel, how exposed the UK economy is to a sustained oil price shock of this magnitude. This is not a comprehensive forecast — the model excludes monetary policy, exchange rate adjustment, investment, and fiscal response, all of which would alter the composition of the impact in practice.

What it does show is that a Hormuz closure transmits to the UK primarily as a household income crisis: higher production costs pass through to consumer prices, eroding real incomes and compressing spending and output in a slow, compounding deterioration. It also shows that the duration matters as much as magnitude, and even a spike resolved within a year leaves a GDP scar that outlasts the price shock itself.

This analysis was conducted in Python using a modified version of the Policy Engine Python Implementation of the OBR Macroeconomic Model : https://github.com/PolicyEngine/obr-macroeconomic-model

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *