Oil’s well that ends well? Yes for the climate but not for austerity-hit families

You may have missed it while you were looking the other way, distracted by the nonsense coming out from the Brexit and Bremain camps, but something important happened.

The price of oil has risen from around $32 a barrel in mid-February to almost $50 a barrel by mid-May. Indeed on 16 May alone while Boris Johnson was banging on about Hitler and George Osborne was roping in Ryanair in support, Brent crude jumped 2.5% in one day alone.

Compared with the levels of above $110 that it had two years ago, that might seem much, but inflation of 53% in a matter of three months is not to be sneezed at.

Thanks to the high levels of tax - correctly for climate change reasons - on petrol, the increase in crude prices has only a marginal impact on motorists as more than 70% of the pump price goes to the Treasury.

Nevertheless the average cost of a litre of fuel is now at £1.073, according to the AA’s fuel price report, up 5.2% from £1.02 in February. Many supermarket petrol stations were selling at 99.9p back then.

The leakage of disposable income from drivers’ wallets and purses may have added to Brexit worries to push consumer confidence back into negative territory, and predictions that economic growth will slow to 0.2% in the second quarter of the year.

Devastating wildfires in Canada, sabotage attacks in Nigeria and problems in Venezuela where the failing economy is causing supplier payments to be delayed have together acted remove as much as 3.6 million barrels per day of output.

every dark cloud has a silver lining, and in this case the colour is green

Goldman Sachs - the most bearish of the leading commodity banks - has raised its forecasts for oil price rises. “The oil market has gone from nearing storage saturation to being in deficit much earlier than we expected,” said the bank.

The worry is that oil prices are on the brink of a delayed surge in prices following the sharp plunge in prices that has put many producers particularly those in shale oil and other hard-to-get-to oil fields out of business.

With the Opec cartel operating at full pelt - as part of the Saudi strategy precisely to put these upstate US shale operators out of the market - a pronounced economic recovery and/or an outbreak of Daesh-related terrorism in the Middle East could leave the world short of oil.

One analyst, Dan Steffens, the president of the oil industry networking firm Energy Prospectus Group, has gone as far as to say that oil could break back through $100 a barrel.

Thanks to four decades of deindustrialisation and the achievements of the green lobby in encouraging more efficient household behaviour, the UK economy is less dependent than it had been in the past.

But that is far from saying we are independent. According to analysis by PwC, a third of the inputs used by the electricity, gas,  steam and air conditioning supply sectors come from petroleum, with air transport not far behind on over a quarter.

Within the oil-intensive manufacturing sector, oil and gas-related inputs and energy consumption account for at least 10% of total intermediate consumption for the following sectors: the manufacture of refined petroleum, industrial gases and chemicals, cement and metals.

Its modelling shows that a bounceback to $110 a barrel will deprive the economy of a dividend of an average of 1% of GDP a year if prices had stayed below $50 from 2014 through to 2020.

At the same time higher oil prices are likely to feed through to higher inflation. This has already manifested itself in the United States, where the 0.4% monthly increase in consumer prices was the biggest gain since February 2013 thanks to an 8.1% month on month rebound in gasoline prices.

In the UK inflation has been bumping along near the zero bound for some time but a revival in oil price could start to see that heat up.  Oil above $100 a barrel put inflation back at its 2% target by 2018.

Given the warnings that Bank of England Governor Mark Carney gave about the inflationary impact of a Brexit, an oil price would be the last thing the economy needed. Slowing growth, rising inflation and hikes in interest rates would be an unpleasant cocktail.

But every dark cloud has a silver lining, and in this case the colour is green. The fall in the oil prices pulled the rug underneath climate change negotiators even as they were agreeing the latest deal in Paris last December to cut pollution and tackle global warming.

That may be cold comfort for households facing another price rise amid of the post-austerity climate of low pay, lower benefits and soaring housing costs. The slump in oil prices gave everyone a breather - except the climate - and now it is payback time.

More about the author

About the author

Phil has run Clarity Economics, a London-based consultancy, since 2007 and, before that, was Economics Correspondent at The Independent.

Phil won feature writer of the year Work Foundation Work World media awards in 2009, and was commended by the Royal Statistical Society in 2007.

He is the author of Brilliant Economics and The Great Economists.

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