Introduction
On 28 February 2026, the US and Israel launched an attack on Iran with the wide-ranging intentions of degrading Iran’s nuclear program, ballistic missiles, navy, drones, and control of its terror proxies. Iran has responded by launching drone and missile attacks on Israel and on US allies in the Gulf region. This region, and in particular the Strait of Hormuz, is important for global oil markets, and the conflict has resulted in significant increases in the cost of oil globally.
The David Hume Institute’s latest analysis suggests that the cost of living was already among the top issues for Scottish voters ahead of the May 2026 election. This concern is likely to have increased following the conflict in the Middle East and memories of the initial impact that the Russian invasion of Ukraine caused in 2022. Given that Russia’s illegal invasion of Ukraine continues to this day, the launch of the US and Israeli war with Iran is likely to result in an increased impact on UK energy prices. What is less clear at this stage is how long the US and Israeli action against Iran will continue for, and therefore how severe the impact on energy prices will be and for how long that price shock will continue.
The blog examines how a price spike in oil markets could impact households and businesses in Scotland, summarises some of the economic impacts caused by the Russian invasion of Ukraine in 2022, and sets out some of the factors that will influence the economic impact this new conflict might have.
How does the price of oil affect consumers and businesses in Scotland?
While there is a lot of uncertainty around the duration of the conflict and the impact on oil prices, there are several ways in which it is already impacting consumers in Scotland.
There has already been a significant impact on the cost of oil for those who live off the gas grid and rely on deliveries of oil for heating. The Guardian notes that some customers have seen prices increase nearly threefold following the start of the conflict. The latest data shows that 20% of Scottish households were not connected to the gas grid in 2024. On 15 March the UK Prime Minister announced £53 million in support for households facing increased heating oil costs – £4.6 million of this will be provided to the Scottish Government to distribute. In addition to this funding, the Scottish Government has announced a £5.4 million fund for lower income households who rely on heating oil to warm their homes. The fund will be launched on 1 April.
The increase in the price of oil has also started to impact the cost of diesel and petrol – the RAC notes that the average price of diesel has increased by 19.7 pence between 28 February and 17 March, while the average price of unleaded petrol has increased by 9.5 pence over the same period.
Beyond products which use oil, there has also been an immediate impact on the cost of some financial products. Markets in the UK had been expecting a steady decline in inflation throughout 2026, such as that forecast by the Office for Budget Responsibility (OBR) earlier this month, and as a result expected that the Bank of England would continue to reduce interest rates. However, concerns around the impact on inflation from the conflict have already seen some banks increase the interest rates on fixed rate mortgages, with the Guardian noting that average interest rates offered have increased above 5%, and hundreds of fixed rate products have been withdrawn. The BBC notes that since the start of the Iran war, the cost of a ‘typical’ mortgage has increased by nearly £800.
In the coming months, there are likely to be further products and markets impacted by the conflict. Ofgem set a price cap for consumer energy bills in the UK which is influenced by the wholesale costs of gas and electricity, among other factors. This price cap is fixed quarterly, and Cornwall Insight forecasts that the July price cap could rise by £160 compared to the April price cap. This is the price increase that an average household would expect to pay, but it would only affect those on a variable tariff or taking out a new fixed tariff after July. It’s also worth noting that energy bills are expected to fall for an average household by £117 from April 2026, largely due to policy announced by the UK Government in the 2025 Autumn Budget.
There is scope for further impacts depending on the duration of the conflict. The National Institute for Economic and Social Research has suggested that if the effects on the cost of oil last for just one quarter, inflation will be 0.3 percentage points higher in the UK in 2026 with a small impact on GDP. However, if the impact persists for a year inflation would be 0.7 percentage points higher, GDP growth in the UK could be 0.2 percentage points lower, and the Bank of England may need to raise interest rates above 4%.
What has been the economic impact of the Russian invasion of Ukraine?
The price of oil and economic performance are closely linked, with the University of Warwick noting that the price of oil has large negative effects upon profitability and that nearly all post-World War II recessions have been preceded by oil-price shocks.
Ofgem publishes regular data on the wholesale prices that energy suppliers in the UK face. This shows that in 2021, wholesale gas prices were increasing steadily to above 100 pence per therm, however following the Russian invasion of Ukraine this peaked at 592 pence per therm on 22 August 2022. By mid-February 2023 the price had reduced to under 150 pence per therm, and since April 2025 has been below 100 pence per therm.
The significant increase in the price of gas had a material impact on energy costs across the UK. There is a direct impact on the price that energy companies pay to distribute gas to consumers, but it also has an impact on the price of electricity due to the way that the market is structured. In 2021, 39.8% of UK electricity was generated from gas, an increase of around four percentage points since 2020. As of 2024, this has reduced to 35.6%.
Since 2019 Ofgem has operated an energy price cap which limits the unit price that suppliers can charge households on default tariffs in the UK (business and other non-domestic properties like schools and hospitals are not covered by the Ofgem price cap). Ofgem calculates the price cap reflecting the costs suppliers face in delivering energy to consumers, including the wholesale cost of gas and electricity. This price cap was originally updated twice a year, but since summer 2022 it has been reformed and is now updated quarterly.
As the price cap factors in wholesale costs faced by energy companies, the increase in the price of gas had a significant impact on the cap – so much so that between 1 October 2022 and 30 June 2023 the price cap was superseded by the UK Government’s Energy Price Guarantee, which limited consumer bills.
The chart above shows the prices that a household with typical energy usage would face, determined by Ofgem’s price cap or the energy price guarantee since 2020.
In addition to the impact on the international price of gas, the Russian invasion of Ukraine also impacted other global trade and commodities, including a significant impact on the cost of food production. Taken together, these price spikes across goods resulted in a significant increase in the headline rate of inflation faced by consumers in the UK. The Bank of England (BoE) targets a rate of consumer price index (CPI) inflation of 2% per year, but following the conflict, inflation increased to nearly five times this rate. Although the rate of CPI inflation has reduced from this peak, it has still not returned to the BoE’s 2% target.
There were other economic and geopolitical factors contributing to this significant period of inflation – not least the recent volatility in international trade, but the Russian invasion of Ukraine contributed significantly to the sustained increased cost of energy and food in the UK.
How might this new crisis be different?
While the present conflict in the Middle East has already impacted the global price of oil and gas, there are likely to be several differences in the economic impact compared to that of the 2022 Russian invasion.
Cornwall Insight notes that in response to the Russian invasion, there has been a structural change to European gas imports – moving away from Russian pipeline imports and turning to liquified natural gas (LNG). This transition is likely to mean energy bills in the UK do not return to their pre 2022 level, because:
LNG is more structurally expensive than pipeline natural gas.
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The price of LNG can be further inflated by factors such as competition from Asian economies.
The Institute for Fiscal Studies notes that, as of 12 March, the gas price increases are not as large as those experienced during the 2022 Russian invasion of Ukraine. However, they point out that household energy bills are 14% higher in real terms at the start of 2026, compared with the price before the Russia-Ukraine war.
Scotland has been a significant net exporter of electricity to the rest of Great Britain for many years, with generation (51.8 TWh) more than twice consumption (21.7 TWh) in 2024. This has been driven in large part by a significant increase in renewable electricity generation, with installed capacity increasing by over a third since the Russian invasion began in 2022.
The role of electricity currently used in heat and transport in Scotland is low, but rising steadily. Just over 10% of domestic properties have heat pumps or other electric heating, with the number of heat pumps installed increasing by 17% in 2024 compared to 2023. The percentage of Scottish drivers owning an electric car or van has steadily increased in recent years, from 4.1% in 2022 to 5.8% in 2024.
However, even with the growth in renewables, official statistics show that oil and gas continue to make up most of Scotland’s energy consumption. In 2023:
- Oil and petroleum make up 45.5% of all Scottish consumption and gas makes up under a third (31.0%). Only 23.5% of all Scottish consumption comes from other fuels. This means that oil and gas make up 76.5% of all Scottish consumption, slightly higher than 74.0% for the UK as a whole.
- In the domestic sector in Scotland, gas makes up two-thirds of all consumption (64.9%).
- Oil and gas make up 88.0% of Scotland’s heat demand.
The UK Government publish statistics on the origin of fossil fuels. For petroleum, the UK was a net importer of products in 2024 by 13 million tonnes, an increase of 16% on 2023. In 2024 the United States regained its position from Norway as the number one exporter of crude oil to the UK. Imports from the US accounted for over a third of total crude imports and were up by 23% compared to 2023. At 16 million tonnes, 2024 was a record year for UK crude imports from the US. Norway was the second largest source of crude imports at 13 million tonnes, down 6.3% on 2023, but still accounting for 31% of the UK’s imported crude. The UK Government’s Digest of UK Energy Statistics notes:
The ban on imports of Russian oil introduced on 5th December 2022 forced importers to diversify and seek different crude sources. The UK has not imported any oil from Russia since the ban. Crude sourced from current OPEC countries increased by over a third from 2022 to 2023 following the ban and increased another 9.1% from 2023 to 2024. In 2024, OPEC countries were the source of 20% of UK crude imports. The UK also exports a significant amount of crude oil, mainly to the Netherlands and other European countries, with crude exports up by 1.6% compared to 2023.
For gas, pipeline imports of Norwegian gas were the largest source in 2025, accounting for nearly 70% of total imports (a 4.6% decrease compared with 2024). The second largest source (23%) of gas imports was LNG from the US, increasing by 38% compared with 2024. Other countries making up the mix include Belgium and the Netherlands (pipeline 1%) and Qatar (LNG – just under 2%). The UK has the second largest LNG regasification infrastructure in Europe, behind Spain, with three import terminals – Dragon, the Isle of Grain, and South Hook.
Whilst the UK does not appear to be overly reliant on oil and gas from the Middle East, a wider reliance on imports from Norway and the US means that competition from markets that are reliant on supply from Gulf states will lead to global price inflation.
Possible questions for the next Scottish Government
Whilst international relations and energy policy are reserved, the consequences of geopolitical developments have clear impacts on areas of devolved competence. The economic consequences of the conflict in the Middle East will set the context for the next Scottish Government. Anything making the cost of living more acute will increase pressure on the new government to provide support to businesses and households.
The Scottish Government’s Medium Term Financial Strategy (June 2025) and Spending Review (January 2026) highlight the considerable pressure on budgets expected during the next Parliament, so this pressure to provide additional support will add to the financial pressures on the new government.
The Climate Change Plan (November 2025) sets out the actions that the Scottish Government proposes to take to achieve emissions reduction targets. These actions aim to reduce the use of oil and gas in energy consumption in the medium term, which if successful will reduce the reliance on oil and gas imports, and therefore reduce the impact that changes in the price in international markets will have in Scotland.
The UK Climate Change Committee states that:
While achieving Net Zero requires investment, for every £1 spent there will be £2 to £4 in benefits. A decarbonised UK will provide greater energy security and be cheaper to operate and maintain than the system we have today. The cost of wasted energy will be halved.
In the short term, however, Scotland and the UK are likely to remain reliant on imports of oil and gas. The next Scottish Government will have to consider how it provides households and businesses support with the cost of living, while balancing other commitments such as achieving statutory child poverty targets.
Andrew Feeney-Seale, Alasdair Reid and Iain McIver, SPICe
“Buaning Oil refinery at Sendai port” by ChiefHira is licensed under CC BY-SA 3.0.