The energy price shock that wasn't

Now that the US and Iran have agreed an interim peace deal which brings an end to the war that has raged for three and a half months, and, crucially, will lead to the opening of the Strait of Hormuz this week, I took some time this morning to reflect on its impact on the oil price as a proxy for the harm that it might have been expected to inflict on the UK economy. This might also serve as a proxy for the damage inflicted on other developed economies, such as the UK.

The context here is that policymakers, both politicians and central bankers, have described the oil price increase since late February as a 'major energy price shock', and indeed, this shock was cited as the reason for a quarter-point increase in EU interest rates last week. Politicians and bankers have not been alone on this either; the investment industry consensus has also promoted the idea that this shock will challenge the world economy and lead to significantly higher inflation and lower growth, at least in the short to medium term, with some arguing as well that it will take many months for the oil market to return to normal.

Even before this latest development in diplomatic talks, global policymakers have been ratcheting up their warnings that a new price shock is coming, as government oil stockpiles and commercial inventories run dry.

Oil industry faces ‘gruesome’ demand shock from Iran crisisft.com · 02 Jun 2026 ↗

Before looking at this consensus narrative, I wanted to put some context around this ‘major energy price shock’ by comparing what’s happened to oil prices so far in 2026 with the average annual oil price for each year over the last twenty years. The chart is shown below.

So far, given that we have experienced three and a half months of Persian Gulf conflict, the price has averaged just over $86 a barrel (Brent Crude ). If we assume that for the remainder of the year prices fall modestly, such that the average for the year comes down to about $82, above the first two months of this year but well below the peaks of March and April, which seems reasonable, then we can put 2026's experience in the context of the last twenty years.

As the chart clearly shows, oil prices were weak in 2009, during the recession that followed the financial crisis, and amid the pandemic’s bizarre circumstances. They also fell significantly in 2015 and 2016 when the shale boom in the US coincided with OPEC's decision to maintain output. Outside of these periods, oil prices have remained fairly consistently above $70 a barrel and, in fact, in nine of the twenty years before 2026, the price has averaged about $80 or above. (I have included 2010 in this group, when the price averaged $79.5.)

Even if we assume the oil price remains at $86 for the remainder of this year, which seems highly unlikely, that would make 2026 the seventh-worst year in this twenty-year history. The picture changes again if we adjust for inflation over this period. Below is a chart of Brent Crude adjusted for US inflation over the same period.

Aside from the financial crisis, the pandemic, and the shale boom, the real oil price has remained in a fairly tight band over this twenty-year period, and the latest uptick looks far from exceptional. In fact, this morning's Brent Crude price ($81) is 33% below its June 2006 level, adjusted for inflation.

None of this should come as a surprise if you were watching the right signal. Throughout the conflict, I paid far more attention to oil prices than to political rhetoric, and for good reason. Like a betting market, where real money is wagered across a range of outcomes, the oil market reflects an enormous number of transactions — physical barrels changing hands alongside far greater volumes of financial directional bets — and it has been a much better guide to the shifting probability of a settlement than anything the politicians have said.

Consider what that signal was telling you. Before the war, West Texas crude sat at around $63. It peaked at $113 in early April and was still as high as $109 just over two weeks ago, before falling below $90 — roughly halfway back between the peak and the pre-war price — and then lower still to where it trades this morning. At no stage did it come close to the lurid forecasts; one leading voice argued that three months of conflict would push the price to $185 a barrel. In the final fortnight alone, as the exchanges of fire continued and the politicians equivocated, the oil price fell by close to 20%. The market had worked out where this was heading well before the announcements caught up with it.

In summary, the oil price spike we have just witnessed over the last three and a half months, which was described by the head of the ECB last week as a 'major energy price shock', or by the Economist as a 'looming structural crunch', which Rachel Reeves warned would lead to a spike in government borrowing and which the Bank of England said in a worst-case scenario would push inflation above 6% and much higher interest rates, in fact, looks far from exceptional. Indeed, I would be hard-pressed to describe it as anything other than the normal energy price volatility witnessed over the last twenty years. Citing it as the reason for a new round of global economic woe looks like another example of the kind of consensual institutional hysteria we have witnessed all too frequently in recent years. Yes, it could have been a lot worse if the war had continued for many more months, but as I have been arguing since it started, this didn't look to me like the sort of conflict that would last years, especially once the embargo was in place, and that more pragmatic view is exactly what the oil market reflected in recent weeks.

The MPC will meet this week to decide on interest rates, with its decision announced on Thursday. Given the by-election in Makerfield and the significant retreat in the oil price from the last MPC meeting at the end of April ($95 a barrel), my guess is that the committee will decide to hold rates, but I suspect that the inflation hawks, including the Chief Economist, will still be calling for higher rates. For what it's worth, if I had a vote, it would be for an immediate cut.