Oil price could boost UK GDP and employment

The significant fall in oil prices since mid-2014 should increase overall UK economic activity. In a scenario where the oil price settles at just US$50/bbl, this could boost the level of GDP by around 1% on average between 2015 and 2020 relative to a baseline case where oil prices remain at the mid-2014 levels of around US$108/bbl. In this case, employment also increases by around 160 000 by 2016, although the effect could then moderate to around 90 000 by 2020 (see Scenario 1 below), according to PwC analysis in its latest UK Economic Outlook report.

Increase in total UK employment relative to baseline: 2016 and 2020

• Oil Price Scenario 1 (settling at US$50/bbl) - 2016: 121 000; 2020: 91 000
• Oil Price Scenario 2 (rising to US$73/bbl by 2020) - 2016: 53 000; 2020: 37 000
• Oil Price Scenario 3 (rising back to US$108/bbl by 2020) - 2016: 11 000; 2020: 3000

In contrast, the impacts are much smaller where the fall in the oil price since mid-2014 is wholly or partially reversed by 2020. In Scenarios 2 and 3 above, PwC analysis found that the average impact on the level of GDP is 0.2 - 0.5%, with employment effects in 2020 of around 3000 to 37 000 depending on how far and fast oil prices rebound.

“Future oil prices remain highly uncertain, so businesses would be well advised to look at alternative scenarios,” said John Hawksworth, Chief Economist at PwC. “In our central case, where oil prices rise back gradually to US$73/bbl by 2020, we project UK GDP to be around 0.5% higher on average over the next five years and employment around 40 000 higher in 2020 than if oil prices had remained at mid-2014 levels.

“If the oil price were instead to settle at US$50/bbl, however, then the eventual boost to UK employment could be more than twice as large as this at around 90 000 in 2020.

“Real household incomes also rise as oil prices fall, which increases consumer spending. And as a result of growing economic activity, we expect that government tax revenues will rise as the tax take from corporate and personal income taxes increases by more than the loss of North Sea oil and gas revenues.

“Lower oil prices should therefore have a positive impact for most sectors of the economy, households and the government, but the scale of these benefits remain highly uncertain depending on how oil prices evolve from here. And of course this does pose important challenges for the North Sea oil industry that the Chancellor should bear in mind in making Budget decisions.”

Adapted from press release by Rosalie Starling

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