UK Economic Outlook March 2015: The impact of lower oil prices on the UK economy

"Employment increases by around 90,000 by 2020, with a peak boost to employment of around 120,000 in 2016."

  • The significant fall in oil prices since mid-2014 should increase overall UK economic activity as the cost of production decreases for businesses, especially for those that are heavily dependent on oil inputs. This will boost both investment and employment.
  • Although the oil and gas extraction sector is negatively affected by the reduction in the oil price, sectors such as agriculture, air transport, coke and refined petroleum manufacturing and oil-intensive manufacturing sectors will benefit as the price of their key input falls.
  • Water transport and other services sectors will enjoy a small positive impact. However, oil-intensive sectors are likely to benefit from the reallocation of capital and resources at the expense of less oil-intensive sectors.
  • We use a model of the UK economy to quantify these effects in three alternative scenarios. In a case where the reduction in the oil price is permanent, settling at around $50 per barrel, the size of the UK economy (GDP) increases by around 1% on average relative to the baseline between 2015 and 2020. Employment also increases by around 90,000 by 2020, with a peak boost to employment of around 120,000 in 2016.
  • In contrast, the impacts are smaller where the fall in the oil price is temporary: depending on how far and fast oil prices rebound, the boost to GDP could vary from 0.2-0.5% and the increase in employment by 2020 could vary from 3,000 to 37,000.
  • Real household incomes also rise as oil prices fall, which increases consumer spending. This is due to two factors: overall consumer prices fall as cost savings are passed on to households and real wages increase as demand for labour rises in fast-expanding sectors.
  • As a result of growing economic activity, government tax revenues also rise as the tax take from corporate and personal income taxes increase, more than offsetting declining revenues from the oil and gas sector. The fall in the oil price should also have a small impact in narrowing the UK trade deficit.