The conflict in the Middle East has triggered a major shock to global energy markets, with the effective closure of the Strait of Hormuz triggering the largest supply disruption in the history of oil markets and significantly impacting supplies of natural gas and a range of energy-related commodities.
As concerns over supply security have grown, prices have risen across several parts of the energy system, increasing pressure on household budgets, public finances and economic activity more broadly. In response, many governments have announced emergency measures to protect consumers from higher energy costs. The IEA has supported these efforts by launching its largest-ever release of emergency oil stocks, publishing a menu of demand-side measures that governments, businesses and households can take to shelter consumers from price pressures, and tracking the actions being taken through its new Energy Crisis Policy Response Tracker.
So far, governments have supported consumers in two ways: through direct price relief, such as fuel price caps or tax cuts, and through demand-side measures aimed at reducing energy use. Designing these measures well is critical, and international experience offers useful lessons.
While easy to deploy, untargeted energy bill support primarily benefits higher-income households and puts pressure on public finances
When prices rise sharply, governments often first turn to broad-based price support measures that can provide immediate relief to consumers. This is already happening, with several countries in Asia and Europe temporarily capping fuel prices or reducing energy taxes.
However, while untargeted support measures can be implemented relatively quickly, they present two major challenges. First, universally lowering the price of fuel when supply is tight sends the wrong market signal, weakening incentives to reduce energy use and improve efficiency in the context of the current supply-demand gap. Second, much of the financial support does not reach those who need it most: low-income households struggling to pay their energy bills. Because higher-income households tend to spend more on energy in absolute terms, broad-based price reductions often deliver greater financial gains to higher-income groups. For example, a recent study in the Netherlands estimates that around 70% of the total value of a broadly applied reduction in fuel excise duty ends up benefiting middle-high and higher-income groups.
This is particularly important because lower-income households are also the most exposed to energy price shocks. At the height of the 2022 energy crisis, low-income households in advanced economies spent around one-quarter of their income on energy - up 4 percentage points from 2021. By contrast, median-income households spent around 10% of their income on energy, with an increase of less than 2 percentage points.
Untargeted support also comes at a high fiscal cost. Governments spent around USD 940 billion in direct grants, vouchers and tax reductions in response to the 2022 energy crisis, yet only 25% of this support was targeted. With public finances still under strain following the Covid-19 pandemic and the 2022 energy crisis, many governments now have less fiscal space to sustain broad-based measures. This constraint has already been acknowledged in several European countries. In response to the current crisis, the OECD has recently warned against relying on broad-based support measures over the longer term.
