Oil prices

 

                          When oil prices first soared in 1973-4 they were blamed for the recession and collapse which occurred in western economies. In practice there were other things wrong with the economies then, with banking difficulties and a switch from easy money to tight money at the same time. It is also true that in those days western economies were more dependent on imported oil. The Uk was just developing the North Sea oilfields. Western countries had a bigger manufacturing sector which used more energy than the services which came to replace some of it.

                       Oil price hikes since have done less apparent damage, though they are not helpful to the western importing economies who rely on foreign oil. There is always an inflationary impact. The fuel price is important in its own right, and  fuel prices also tend to push up other prices, as fuel is needed for transport and production of many other goods.There may also be a deflationary effect. As people and businesses have to spend more on oil, they will have less to spend on other things, unless they can push up prices  and  wages enough in an inflationary way.

                 This latest oil price rise is unlikely to lead to successful inflationary pay settlements in the US, the UK or the Eurozone. It will be one more reason why living standards get hit. It will be a deflationary force on the economies later this year, to add to the downwards forces of  slowing demand in the emerging market countries, and tight bank credit in the post bubble retrenchment by the western  regulators. If the loss of oil output is on a  Libyan scale, and is temporary, the price rise might abate as that becomes clear. If the troubles spread into Saudi Arabia and production there is damaged, the markets may well take fright and push the price considerably higher.

             Most forecasters assume there will still be a good supply of oil from the Middle East, and that overall global economic growth will continue at a reasonable rate this year. Now, however, forecasters and policy makers should take note that there could be disappointment later in the year. Money is tight in the west, and getting tighter in the emerging markets economies. If the oil price goes too high on top of this, it will curb the growth and cause particular difficutlies in troubled economies like Greece and Ireland.

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9 Comments

  1. lifelogic
    Posted March 9, 2011 at 3:58 pm | Permalink

    The oil price and tax is also another reason for many just to claim benefits and not work. Travel to work and childcare are generally not tax allowable. So you might loose 30% in tax and NI and find that after fuel and travel cost, work cloths & lunch the state is telling you, fiscally and through the benefit system, that they prefer you not to bother. Stay at home and do a bit of DIY and more efficient shopping instead and be better off and have more time too.

    • lifelogic
      Posted March 9, 2011 at 4:53 pm | Permalink

      This particularly if your wages are kept near to the minimum wage by competition from other workers due to the EU open borders rules.

  2. zorro
    Posted March 9, 2011 at 7:17 pm | Permalink

    We’re on the ‘Road to Serfdom’……

    Zorro

  3. Bazman
    Posted March 9, 2011 at 8:12 pm | Permalink

    It will be interesting to see where it all goes as petrol reaches the £8 gallon (175.9).
    Fill up a Mondeo, buy a packet of fags if you smoke, a sandwich/crisps, a paper and you would be looking at £105+. Huge swathes of the population take home about a thousand a month of which about £700+ must go on living expenses. Like mortgage/rent/utility bills. Something has got to give. Here’s an idea! Give up smoking, make your own sandwiches and drive slower without unnecessary journeys, like going to work. Self respect is over rated anyway.

  4. Conrad Jones (Cheam)
    Posted March 9, 2011 at 8:13 pm | Permalink

    Libya:

    http://www.dailymail.co.uk/news/article-1361294/Libya-Peter-Mandelson-defends-Gaddafi-saying-Tony-Blair-right-make-friends.html

    “Shameless Mandelson defends Gaddafi’s clan as he claims Blair was ‘absolutely right’ to make friends” – well… we all like making friends. Tony Blair was friendly.

    It would be refreshing to hear an Aopology from Tony Blair – if in fact, Gaddafi is indeed “unfit to Govern” as many News Papers have been saying. If so – was it wise for Tony Blair to sell him weapons and allow British Oil workers into such a harsh country, knowing that the weapons we sold him could be used on his own people – assuming the current News is accurate?

    Funny how Foreign “Aid” works these days. I heard Peter Hain on Question Time the other week, defending Labour’s “Aid” programs to places such as Libya and Egypt, to name two of the Countries (or Regimes) gratefully receiving aid. Gaddafi promised not to make Nuclear Bombs or Chemical Bombs so we promised to sell him a load of other Weapons. And we kept our word, an so did he.

    Saddam Hussein was another ‘blued eyed boy’ in the eyes of the West in the Eighties when he did what he was told. Is there any truth to the rumour that Saddam Hussein was considering switching from the US Dollar to the EURO for payment of the Iraq Oil?

    Is it true that Iran is considering a similar move to the Euro with dire consequences for the US Economy?

    Why is it that Countries which are now experiencing austerity measures can always find an Aircraft Carrier nearby (The USS Entrerprise) when supposedly helping the oppressed peoples of a Country who we and the United States supplied military arms to? I can understand sending large military Aircraft to evacuate people but do we really have to to send a Nuclear Powered Ship full of Fighter Jets and Missiles to rescue people? This seems like the same War mongering exercises off the coast of North Korea in December or a prelude to Invasion. Very Victorian.

    Some News Media outlets in Eastern Europe are saying that there is no evidence of attacks on Protestors in Libya from Military Aircraft, based on Satellite Imaginery.

    The frequency and seriousness of World Events seems to be quickening, but to what end.

    Why is it that one minute a Dictator is a friend to the West, next minute they are portrayed as unbalanced and slightly worse than Hitler. And the News media always concentrates on the fate of the oppressed while ignoring the key issue of Oil and economic control over a foreign country which is what this is really all about.

    Perhaps one reason why oil is so expensive is that the American Government have been encouraged it’s use through low fuel taxation – and have been cushioned from the high taxes incurred in Europe and the rest of the World. This policy was used to buy elections and has contributed to the instability in the Middle East.

  5. norman
    Posted March 9, 2011 at 9:40 pm | Permalink

    It’s the type of oil that isn’t being distributed that is important. A little like refinery capacity, it’s not the total coming out of the ground that’s so important, it’s what it can be used for / refined into that matters.

    Rising prices at the pumps (primarily due to scandalously high taxes) and rising heating bills (primarily due to scandalously high taxes) won’t help the government.

    Can’t the Lib Dems propose a tax cut in fuel duty or a scaling back of the green madness? Obviously any tax cut proposed by a Conservative will be dismissed out of hand as too nasty but if you can get a Lib Dem to propose it there’s a good chance it will happen – especially if they mention it will help them after their (as well as your) meltdown in May.

  6. David John Wilson
    Posted March 9, 2011 at 11:10 pm | Permalink

    If we could stop charging VAT on oil and only charge a fixed rate of duty, increased if necessary to reflect the VAT revenue lost we would immediately dampen some of the effect of world prices. It would have the following effects:

    The cost difference in remote locations would be reduced as the delivery costs etc. would not carry VAT.
    Similarly price increases due to world price rises would also not carry VAT
    The duty charged could be adjusted according to the needs of specific regions.

    This principle could be appied to petrol, diesel, heating oil etc.

  7. Lindsay McDougall
    Posted March 9, 2011 at 11:21 pm | Permalink

    Thankfully, we have always proved to be ingenious in making fuel efficiency savings whenever the oil prices rises. Long may this continue. However, there is no reason why we should pay more for petroleum than our European competitors; that is down to taxation.

  8. Gary
    Posted March 10, 2011 at 9:45 am | Permalink

    oil price rises cannot CAUSE inflation. Inflation and deflation are caused by the money supply increasing and contracting, respectively. Commodity prices increasing may be caused by inflation. If not, then supply and demand shifts may cause commodity prices to increase. The distinction is important because govt and the bankers like to mask their inflationary actions using strictly demand and supply price increases.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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