The collapse of the oil price

This year most forecasters assumed oil would stay around $110 a barrel. They correctly saw that US output would rise, but so would demand. Those who pondered more deeply reckoned Saudi would cut her production a little to offset any surplus that emerged. I did not myself expect to see a major price collapse, against the background of raging civil and religious wars close to major oilfields in the Middle East.

Instead oil fell to $95 a barrel, the level market professionals thought would be the Saudi target support price. Instead the OPEC meeting announced no production cutbacks, and the price collapsed to around $60.

For oil consumers it is great news. It means lower inflation and higher real incomes. We all have money to spend on something else that would have been used to fill the car tank and warm our homes. The UK is now a net importer of oil again, so it will make a modest improvement to our balance of payments.

The SNP have been very quiet about the impact it will have on the Scottish economy and revenues. It will show more neutral Scots the value of belonging to the UK. As the oil revenues decline rapidly, so Scotland can still draw on the other tax revenues of the whole UK to make up the shortfall. An independent Scotland would by now be looking at what taxes to raise and what expenditures to cut to offset the fall in oil revenues.

It will worry Labour, as it is a major blow to their “cost of living crisis”. With pay now advancing in real terms for all those in work for longer than a year, this fall in petrol, diesel and other energy costs will give a further boost to the value of take home pay. Generally it will transfer income and spending power to the oil consuming countries, away from the Middle Eastern oil producers, and at the expense of countries like Russia, Nigeria and Venezuela who remain very dependent on oil revenues. Overall it is a boost to consumption and output in the world economy.

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59 Comments

  1. Leslie Singleton
    Posted December 16, 2014 at 5:53 am | Permalink

    May we be preserved from OTT headlines: the oil price has not collapsed nor even close: collapsed means completely and forever as with a balloon: the oil price has merely reduced, albeit considerably. I should be surprised if it hasn’t gone back up again within a very few months once the producers realise that they have let the price, from their point of view, fall too much.

  2. Lifelogic
    Posted December 16, 2014 at 6:36 am | Permalink

    Indeed, but did not the greens not say oil was going to run out in 1990 or something? Many in the Lords now for their totally duff predictions. No doubt the same sort of fools who keep trying to scare everyone with the fiery hell global warming, green crap, exaggeration scares. The Cameron/Clegg/Davey types have been so easily taken in by this new quack-science exaggeration religion.

    Yes lower oil prices are very good news. Making all the green “investments” even dafter and more moronic than they were before. We still however have the fact that energy in the UK is nearly twice the price of energy in the US and other competitors. Relatively the UK will remain very uncompetitive just on energy thank to Davey/Huhne types. Also of uncompetitive of course on over taxation, over complex taxation, daft employment laws, poor roads, lack of a hub airport, over regulation, planning …..

    Funny to see Mary Portas complaining that the government was just making token gestures (re regeneration of retail in town centres and high streets). I thought she was Cameron’s token gesture – did she not realise that was her role? Now she bites Cameron’s hand. It serves him right for such a foolish appointment.

    The main problem for town centres are the huge over taxation of retail shops (even the empty ones), endless government parking ticket muggings, bus lanes, government caused congestions and the lack of (and very high costs) of parking and fuel. Also competition from more efficient on line providers who pay less tax.

    • Mitchel
      Posted December 16, 2014 at 5:08 pm | Permalink

      Before cheering too loudly the possibility of a benefit to the UK arising due to our being a net importer of oil,how about considering the wider effects of much reduced inflows (and,possibly,longer term the repatriation) of hot money from the Arabs/Russians/Nigerians,etc into the UK and specifically London’s property market,Bond St boutiques,Mayfair showrooms,etc. and also reduced exports to those countries adversely affected?

    • Mitchel
      Posted December 16, 2014 at 5:16 pm | Permalink

      Re Mary Portas,see also Carol Vorderman,Kirstie Allsop,etc.Could it be possible that since becoming Tory leader,Cameron has created almost as many Tsarinas as the whole 300+ year old Romanov dynasty!

    • Tad Davison
      Posted December 16, 2014 at 6:57 pm | Permalink

      There’s a lot more of the stuff than the powers that be would like us to know about LL.

      There are massive deposits of oil and gas in Russian territory in the Arctic, which is rather inconvenient for those from elsewhere who wish to control its supply and distribution. The demonization of Russia is their way of setting everyone against them, and for years, that tactic worked. But now, we have the internet and get to see both sides of the argument. Little wonder governments seek to control it too.

      I just wish more people would wake up to what is being done in their name by some VERY unscrupulous people. Russia should have been brought into the fold years ago, rather than kept outside by those with a vested interest. And I might add, with a vested interest that doesn’t serve the people in the West, just an all-powerful elite. An elite that is so powerful, they even have the power to largely cover it up.

      I’ll never have any truck with dishonesty, and will always put the interests of the people first. What a shame the all-powerful politicians on both sides of the Atlantic can’t do the same.

      Tad

  3. Lifelogic
    Posted December 16, 2014 at 6:57 am | Permalink

    “Overall it is a boost to consumption and output in the world economy.”

    Indeed but, in relative terms, industry the UK (and the EU) remain at a huge competitive disadvantage to much of the rest of the World on energy cost. All due to Cameron’s vote blue get greencrap Libdem think religion. I do not think even he actually believes in it – surely he cannot really be that dim? I think he just thought it would win votes and modernise the Tories – he was wrong as usual.

    • Leslie Singleton
      Posted December 16, 2014 at 4:46 pm | Permalink

      Maybe I was still ‘high’ from the operation I had from the hospital yesterday, which I say because I have not seen more about it but did our banana of a PM really agree with Sturgeon’s whine about votes for 16 year olds? Why not five year olds?? Wrong every time and as always irreversibly.

  4. Gary
    Posted December 16, 2014 at 7:19 am | Permalink

    Some people thought that this was political, a lever to collapse Russia. However, that is looking less likely because the US fracking industry is suffering. Yields on energy bonds are now junk. So, it is now looking like deflation. Nothing measures economic activity more than the cost of energy.

    Is the price of oil signalling deflation.? I think so.

  5. Anonymous
    Posted December 16, 2014 at 7:59 am | Permalink

    Is there still such a thing as Mr Osborne’s ‘Fuel Duty Stabilizer’, which sets Fuel Duty to rise automatically in the event the price of oil falls below $75 ?

  6. Matt Robinson
    Posted December 16, 2014 at 8:09 am | Permalink

    Does OPEC really still have the power to control the oil price? One wonders. If they did would they not have exercised it as they have before in similar circumstances?
    There is a lot of oil flowing in from outside OPEC’s dominion these days.

  7. Narrow Shoulders
    Posted December 16, 2014 at 8:20 am | Permalink

    It is most unlikely that the general population will see any improvements as a result of the drop in price of oil. Much of the price of fuel is tax and government will be back for any shortfall from its PAYE serfs later.

    Companies will benefit from the reduction through reduced distribution costs. Again this is unlikely to filter through in reduced prices as the headline prices are already 30-50% off rrp in order to stimulate interest in the tat that is being sold.

    Oil no longer increasing in price is welcome but please do not highlight it as a tax cost or an increase in my standard of living. We are still being plucked by government and business.

    • Margaret Brandreth-J
      Posted December 16, 2014 at 5:18 pm | Permalink

      Oh come on, they may give us one pence here and there .. a few crumbs you could say.

  8. javelin
    Posted December 16, 2014 at 9:01 am | Permalink

    As the joke went 6 months ago – what’s going to be 63 this year?

    Putin, Oil and the Ruble.

    Nobody really expected it.

    Capital controls next for Russia?

  9. formula57
    Posted December 16, 2014 at 9:01 am | Permalink

    The oil price fall, temporary though it may well be, places in difficulty two sets of politicians, being: –

    1. Ed Miliband and fellows – thank goodness they were not in power to freeze energy prices at the former much higher levels (although that might have encouraged energy companies to invest in new capacity); and

    2. The signatories of the infamous Vow and fellow travellers whose myopia has burdened the rest of the UK with supporting an insolvent Scottish nation. And for what? Well as you told us, for reasons of “history, sentiment and politics”. All those, insubstantial as they are, come at a high and increasingly unwelcome price.

  10. oldtimer
    Posted December 16, 2014 at 9:02 am | Permalink

    Yes, a different kind of oil price shock namely a sharp drop in price. Previously such shocks were marked by price increase spikes followed by much higher price plateaus. They were first experienced in the mid and then late 1970s causing gut wrenching changes. With luck the latest price reductions will stick for a decade or two as the shale gas revolution helps keep the oil producers honest.

    There remains a “cost of living crisis”. It is represented by the “cost of renewable energy crisis”. Mr Miliband, as the Secretary of State responsible for the passing of the Climate Change Act, bears that responsibility though is reluctant to claim it. It is time for that Act to be suspended if not repealed and the mindless subsidies granted to the renewable energy industry are removed. That, it seems, will require a significant change in the composition of the HoC and a change of direction by the next government.

  11. Bert Young
    Posted December 16, 2014 at 9:13 am | Permalink

    All very well for the price of petrol and the extra cash in our pockets , but , there is now a flight of capital to “safe havens” and a considerable cut-back in the economies of large parts of the USA and China . The knock-on effects have already devastated stockmarkets . Altogether this is not good news . Demand for goods will reduce and unemployment once again will be hit . Energy prices have been extremely high however the OPEC solution was wrong ; what was needed was a controlled reduction of oil over a period of several months . I fear that the attitude to Russia has had a lot to do with the manipulation of energy costs ; Gorbachev was right – conciliation and not confrontation over the Ukraine .

    • Tad Davison
      Posted December 16, 2014 at 7:13 pm | Permalink

      Gorbachev was indeed right Bert, but that’s not on the agenda of those whose thinking still lies firmly rooted in the past. We’re talking world domination, not conciliation. They want it all, and if they get their way, it’ll be the ordinary people who ultimately pay the price. Already many of the predictions of those who warned us of Fiat currencies and mountains of debt have come about.

      Tad

  12. John E
    Posted December 16, 2014 at 9:14 am | Permalink

    Our home energy prices will not reduce because Labour have promised to freeze the prices for two years. Any company dropping their prices before the election risks having those lower prices fixed for two years, during which time the oil and gas wholesale market prices are much more likely to rise than fall.
    Also companies have bought further ahead than usual to protect against a Labour price freeze and have locked in the higher prices.
    A good example of what can happen when politicians interfere.

    • Mark
      Posted December 16, 2014 at 11:03 am | Permalink

      Quite right. Miliband has locked in high prices for power and gas for consumers, on top of the price rises that come with the silly pursuit of expensive sources of power such as offshore windmills and outrageously priced nuclear power. It was I think also in Miliband’s time at DECC that OFGEM produced the measurement standard that benchmarks Big Six profit margins against 18 months forward hedge purchase. This is a quite unnecessarily long and expensive hedge to maintain, unless customers specifically request a fixed price. It would be far more logical to benchmark against pricing for gas about three months forward, to allow for LNG cargo loading nominations and standard quarterly billing, and likewise for power. It would encourage more competition and wholesale market participation among the Big Six as they would have the opportunity to judge when to trade to lock in prices, and when to sell into overheated wholesale markets. Perhaps the CMA will take this on board in their investigation.

    • Denis Cooper
      Posted December 16, 2014 at 11:20 am | Permalink

      It’s a good example of what can happen when party politics interfere.

      Given that Labour’s “cost of living crisis” was in large part caused by the policies instituted by the last Labour government – reckless overspending, followed by the creation of £200 billion of new money and the use of £198 billion of that to rig the gilts market to make sure that the government could fund its yawning budget deficit in the year leading up to the general election, and the various deleterious effects of uncontrolled and unlimited mass immigration – they shouldn’t really have a leg to stand on, but somehow they continue to escape the blame in the eyes of many voters; however when it comes down to it there is not that much to be said in favour of their main competitors either.

      • Tad Davison
        Posted December 16, 2014 at 7:29 pm | Permalink

        Well said Denis. If only Labour voters could be made to see that.

        Mind you, I did hear an interesting comment by one of their number recently. ‘Get the economy in a b***s up, then bring in people from other countries to put it right, and they’ll vote Labour and keep us in power.’

        That might have been said tongue-in-cheek, I really don’t know, but it sure does make me wonder if that wasn’t what they were really trying to do all along. I wouldn’t put it past them!

        Tad

    • Mark B
      Posted December 17, 2014 at 7:30 am | Permalink

      A good example of what can happen when politicians interfere.

      I agree.

  13. Mark W
    Posted December 16, 2014 at 9:15 am | Permalink

    I’m very grateful with the drop in price of fuel.

    Strictly speaking most of us possibly still spend as much on fuel due to how long we spend sat in queues at needless roadworks or going on lengthy diversions due to road closures.

    In fact next time you (JR) or anyone for that matter come across some smug enviro obsessed politician at any level sprouting off about emissions and cleaning up the air maybe instead of creating ideas that centre on bullying you and me to let us know who’s boss with restrictions maybe what they (particularly councils) should take control of something truly in their power and stop these pointless auto controlled traffic lights that are set up everywhere creating two mile tailbacks at peak times. (They won’t of course cause it really us about letting us know who’s boss and not the environment at all).

    True green measure though. But don’t hold your breath

    • rick hamilton
      Posted December 17, 2014 at 2:26 am | Permalink

      The Japanese did research years ago that showed vehicle exhaust pollution actually decreased with higher traffic speeds. Obvious if you know anything about the internal combustion engine and fuel economy is also improved. They embarked upon a massive programme of road building with new expressway tunnels, bridges and flyovers around Tokyo so that traffic flow is far better now than 25 years ago.

      In the UK climate change fanatics in government try to con us that lower speeds are better for the environment. Motorway congestion seems to get noticeably worse every year with not much being done about it except political promises before an election.

      The M62 for example has mile after mile of cones and 50mph signs for no apparent reason. All it does is make frustrated drivers go faster when they eventually get to the end of it. After all – unlike the bureaucrats causing the delays – many of them are trying to run businesses and meet deadlines.

  14. Stephen O
    Posted December 16, 2014 at 9:23 am | Permalink

    Has anyone actually crunched the numbers on what the new oil prices would mean for an independant Scotland’s finances?

    This information should be put into the public domain. The SNP has every intention of seeking independance again.

  15. Richard1
    Posted December 16, 2014 at 9:25 am | Permalink

    Yes, in fact the oil price fall would be driving a coach and horses through the Scottish separatists calculations and would have thrown a putative independent Scotland into its first financial crisis. What would now be happening on the grey market to the Scottish pound?!

    You don’t mention Mr Davey and his ridiculous projections for green power such as wind becoming economic by comparison with fossil fuels due to the rise he expected in oil prices. It has been a green axiom that oil prices would forever rise.

    What this shows is the folly and absurdity of governments making forecasts of market prices and basing policy on those forecasts. Government forecasts of the oil price have been even worse than global warming experts’ forecasts of climate!

    • Mark
      Posted December 16, 2014 at 10:09 pm | Permalink

      I think the fall in oil prices is part of the reason why the recent Lima climate talks failed to produce any substantive commitments. Wiser nations are very wary of signing up to expensive windmills that could leave them looking very uncompetitive.

  16. ian wragg
    Posted December 16, 2014 at 9:29 am | Permalink

    As it demonstrated on the news last night, pre tax, UK fuel is the cheapest in Europe. It is government greed that makes it one of the most expensive in the civilised world.
    I note also in yesterdays papers that your climate levy is going to cost us all 40% more on fuel bills.
    Ed Davey continues with the myth that our bills are on average £90 cheaper due to the government policies. Pray do tell us how that is when a good part of the price is from a direct subsidy to the windmill Barons. How come we are generating 180,000 green jobs when in fact we are losing energy intensive industry quicker than snow in June.
    Why do you not challenge these stupid statements? I watched with interest the Tonight programme about the EU and was quietly pleased with the surveys which show that the general public do not swallow the LibLabCon line on EU membership and are more in tune with Ruth Lea saying we are shackled to a corpse.
    The final survey was 42% to leave and 31% to stay. Not what CMD or the CBI/BBC want to hear. I suppose you will be issuing guide lines similar to Millipede telling activists not to mention the E word as its a vote loser. Well done the great British Public.

  17. Gina Dean
    Posted December 16, 2014 at 9:54 am | Permalink

    The PM must not give way to the SNP, do not forget the independence party lost.
    Give them an inch and they will demand the mile. As you said they would have been in a lot of trouble with the fall of oil prices
    It’s time that the Conservatives stood up and shook off the Libral Dems drag on the policies that they wish to put forward.

  18. Atlas
    Posted December 16, 2014 at 9:58 am | Permalink

    Quite, John,

    With cheap energy (c.f. the effect the spread of railways had on the price of coal, so growing the industrial revolution) we can finance many things and so get a better standard of living for all.

  19. acorn
    Posted December 16, 2014 at 10:15 am | Permalink

    I was told last night you could buy unleaded petrol for 113 p/l. It was 27 p/l at the dockside. That makes the Tax 68% of the retail price.

    The poor old Russians are getting the Ruble trashed. Not that it matters much, most of Russian commerce appears to be done in US Dollars. Russia has five times the foreign currency reserves of the UK, nearly as much as Saudi. When you flog a lot of oil in US Dollars, you end up with a lot of US Dollars.

    Mind you, there is a nice little earner coming for the $5 trillion a day FX casino. OK Neil Wison spotted it first. If Russia demanded that the EU pay for its gas in Rubles, else it turns the taps off, the EU would have to buy a lot of them Rubles; geddit?

    • Horatio McSherry
      Posted December 16, 2014 at 11:13 am | Permalink

      Didn’t Osbourne set Fuel Duty to rise if oil fell below $75/barrel(?) which means we won’t see the fall we should see?

      John, should this policy be reviewed? (I’m quite prepared to admit that I may be wrong about it).

    • Mark
      Posted December 16, 2014 at 10:05 pm | Permalink

      What would the Russians do with a whole lot of extra electronic rubles? What would they sell them for in the first place? Ah yes, dollars and yen and Euros, so they can use them to buy the imports they need.

      The advantage to the US of requiring payment to be made in US Federal Funds is that the payment must go via New York. That means business for the US banking system, and also the ability to block payments the US doesn’t want to see made (i.e. an ability to impose an embargo) – advantages that are lost if payment in offshore dollars (e.g.Eurodollars) are acceptable. The choice of currency is rather more incidental: it has some benefit through causing a transactions demand for money, and for providing an income stream from currency conversions to and from the dollar. The advantage to those with substantial international trade positions of mainly using one currency based in one financial centre is an ability to limit currency risk, payment and currency conversion cost. There is also some political and performance risk, which is why many companies maintain secondary treasury operations in one or more of the other main global financial centres, as well as for reasons of regional and time zone convenience.

    • Tad Davison
      Posted December 16, 2014 at 10:26 pm | Permalink

      Once China realises that if Russia falls, they’re next, we might see an enhanced trade deal between the two countries to keep Russia solvent and out of the clutches of the REAL evil empire.

      Those like Blair and Heseltine who say globalisation is inevitable are really saying the money men in the US will eventually control everything through their manipulative expansionist practises. It’s not too late to call a halt to them – yet!

      Maybe the US should do as some past presidents have wanted and start by getting rid of the Fed. And I see there’s a chance we might get another Bush in the Whitehouse in two years time. I wonder if the people of the US will ever break the dominance of the highly dangerous neo-cons who have delivered so many global disasters without civil insurrection?

      Tad

  20. Tad Davison
    Posted December 16, 2014 at 10:41 am | Permalink

    Some have suggested that the fall in oil prices is an underhanded tactic by the US and the UK to cripple the Russian economy in readiness for a future conflict. That the West is hell-bent on that end is not in doubt, but it won’t happen this way. Yes, the Russian economy is suffering, but Vladimir Putin’s personal popularity is riding far higher than any Western leader. The Russian people have faith in him, and incidentally, so do many people in the West who have come to see just what a corrupt and nasty place the West really is. Next May, we in the UK have the opportunity to correct that, so I hope we’ll do the right thing.

    If this is indeed a tactic to cripple the Russian economy through some very illicit cartel-like chicanery, there could well be an unintended consequence. Watch the bond markets, especially the junk end, and see what happens in the energy sector if the oil price goes much lower.

    It was interesting to see a recent interview in which that once supremely confident Mr Salmond was flapping and floundering about the dramatic fall in oil prices. Given that his party’s spending plans were predicated on an oil price reputed to be $118 per barrel, I would say the Scottish people voted the right way. There IS a lot of oil off the Scottish coast, but it is going to be difficult to get at. You can take it from me that the seas in that part of the world are none too friendly, especially during the winter.

    The advantages of Scotland staying within the UK are there for all to see, but that is quite unlike the UK belonging to the EU – something else that confident Mr Salmond would have shackled the Scottish people to. So perhaps people need to be careful and not confuse confidence with competence (and that applies to some other leaders too).

    Tad Davison

    Cambridge

  21. Denis Cooper
    Posted December 16, 2014 at 10:47 am | Permalink

    We have the drop in the international price of oil, we have had a gradual rise in the trade weighted international value of sterling by about 10%, and we have wages continuing to be suppressed by the effects of mass immigration while some consumer prices are being suppressed by the intensity of competition between retailers, all of which add up to a fall in the annual rate of consumer inflation; but only in the annual rate of increase of CPI, comparing CPI now with CPI a year ago, not to an actual fall in CPI; and over time the effects of the first two will drop out of the calculation, so nobody should work on the assumption that the presently observed falls in the rate of inflation will become permanent, although of course the actual increases in the CPI index will be permanent unless the rate of increase becomes negative.

    • acorn
      Posted December 16, 2014 at 7:39 pm | Permalink

      Keep taking the pills Denis, you will get better.

      • Denis Cooper
        Posted December 17, 2014 at 11:29 am | Permalink

        If you have something sensible to say then say it.

  22. lojolondon
    Posted December 16, 2014 at 11:22 am | Permalink

    We should give credit to the Americans – fracking is a major driver in the reduction in demand and hence the falling oil price. What I believe the Saudis are doing is trying to make it uneconomical to frack, that would be very bad for our balance of payments and self-reliance, but hard to argue economically, except that if we do not start now then it will take so much longer to start up, get permissions, etc. next time.

    • oldtimer
      Posted December 16, 2014 at 6:04 pm | Permalink

      This seems plausible to me. The Saudis have huge fx reserves to maintain a price war against fracking and also, for that matter, against renewable energy subsidies. Fracking in the USA has a certain resilience because, as I understand it, it only costs c$1.5 million to drill a fracking site so that incremental capacity can be added much more easily and at much less cost than drilling oil wells.

  23. CHRISTOPHER HOUSTON
    Posted December 16, 2014 at 12:16 pm | Permalink

    I only wish I were younger so I would have even more time to bask in the future nirvana you describe.

  24. agricola
    Posted December 16, 2014 at 12:22 pm | Permalink

    Nice to see something happening in the free market that is outside the control of the politicos. I suspect that this could well be the beginning of an era of change in terms of energy generation.

    In the immediate future we have the possibility of abundant shale gas. This could keep the oil drilling industry occupied. As the price of oil drops the cost of marginal extraction makes it less attractive.

    I believe it is possible to extract gas from coal seams without recourse to mining. I would be interested to hear from anyone who can elaborate on this from a knowledgeable standpoint.

    In our atomic submarines the Royal Navy spend months living and sleeping next to atomic reactors. I therefore feel inclined to believe they are safe, but the question is one of cost per Kw. If attractive why not set up a string of such reactors on military bases for security, and feed the national grid.

    Longer term there is fusion energy on the horizon. Say thirty to fifty years hence.

    I hope that even the politicians realise the strategic need to be in control of our own destiny in terms of energy generation in a World that is increasingly unstable. We require the level of drive that occurred under the guidance of Lord Beaverbrooke at the outset of WW2. The problem is getting the quality of politicians we have to see beyond their five year term.

    • A different Simon
      Posted December 16, 2014 at 4:19 pm | Permalink

      Agricola ,

      I believe you are talking about drilling into coal seams and dewatering them until the gas desorps , known under various acronyms CSM (Coal Seam Methane ) , CBM (Coal Bed Methane) , CSG (Coal Seam Gas) .

      As far as I know this was the reason for changing trespass laws to allow horizontal drilling at hundreds of feet depth – much shallower than the thousands of feet depth shale gas would be produced at .

      There is also in-situ coal gasification , i.e. partial oxidation of coal aka UCG (underground coal gasification) generating synthesis gas .

      Igas-Dart have waited 2 years for planning permission to move from the CBM exploration phase to production in Airth Scotland and a decision is finally expected in 2015Q1 .

      “Nice to see something happening in the free market that is outside the control of the politicos.”

      uhm , the reasons for the magnitude of the current drop appear to be at least as much political as economic imho .

  25. BobE
    Posted December 16, 2014 at 12:23 pm | Permalink

    Didn’t Saddam threaten to shift oil sales from dollars to Euros? Thats what started the second Iraq war. If people stopped using the dollar then the USA would fold, so Saddam had to go.

    Reply Not so.

    • Brian Tomkinson
      Posted December 16, 2014 at 4:56 pm | Permalink

      Reply to reply,
      Just what about Bob’s statement prompts your reply “Not so”?
      TIME magazine published this on Monday, Nov. 13, 2000:
      ‘Europe’s dream of promoting the euro as a competitor to the U.S. dollar may get a boost from SADDAM HUSSEIN. Iraq says that from now on, it wants payments for its oil in euros, despite the fact that the battered European currency unit, which used to be worth quite a bit more than $1, has dropped to about 82[cents]. Iraq says it will no longer accept dollars for oil because it does not want to deal “in the currency of the enemy.”‘

  26. Terry
    Posted December 16, 2014 at 1:00 pm | Permalink

    It has been suggested that OPEC are maintaining a low price of oil to kill off Shale Oil developments.
    The largest of those are sited in the USA and the Americans will only do what comes naturally to them, if this is the case. They will buy low and stockpile but they will not stop their crusade to become 100% energy self sufficient. I wish this country would do exactly the same. The West has been blackmailed over oil supplies for far too long.

    • Margaret Brandreth-J
      Posted December 16, 2014 at 5:22 pm | Permalink

      I totally agree.

    • Mark B
      Posted December 17, 2014 at 8:34 am | Permalink

      The US imports most of its oil from Canada and other places. Surprisingly, SA make up a small percentage of what the US consumes.

      • Margaret Brandreth-J
        Posted December 17, 2014 at 12:06 pm | Permalink

        The point made about being blackmailed , because we need fuel is salient.

  27. Aatif Ahmad
    Posted December 16, 2014 at 1:04 pm | Permalink

    What will it do to fracking though? Can a fracking boom take off in the UK with such low prices?

    • Mark
      Posted December 16, 2014 at 9:35 pm | Permalink

      Gas prices are independent of oil prices, because gas is often produced separately, and because gas is expensive to transport. Saudi Arabia chose to export its gas mainly embedded in petrochemicals production – ethylene, methanol, vinyl chloride monomer etc. LNG from e.g. next door Qatar (or soon, the USA) is expensive because of the need for a liquefaction plant, and then specialised shipping, and a regasification terminal close to market: all that cost sets a floor which allows locally produced gas that can be piped straight into the local network (after normal processing that applies to all gas) to have a cost advantage over imported gas. Much the same applies to long distance gas pipelines, which also suffer from lack of flexibility in terms of the markets they supply. At present UK (54 p/therm) and US gas prices ($3.60/MMBtu or 36¢/therm), it is only just economic to ship US gas to the UK.

      It should be remembered that the UK has produced a lot of gas at much lower gas prices than the current ones: the original North Sea contracts were for little more than 1 p/therm, albeit in 1970s money.

  28. James Winfield
    Posted December 16, 2014 at 1:18 pm | Permalink

    And a good time to temporarily increase fuel duty to help give inflation a nudge up, revert the loss of tax revenue from North Sea oil, and most importantly to help bring down the deficit.

  29. Tim Bennett
    Posted December 16, 2014 at 5:46 pm | Permalink

    Following on from the oil price reduction, and the consequent fall in the rate of inflation, I would be interested to read Mr Redwood’s thoughts on “the spectre of deflation” which some media commentators have been talking about as something to be avoided at all costs. I am personally extremely sceptical about this notion that the economy might stagnate as people put off making major purchases expecting prices to fall further. If those attitudes were prevalent in our society, nobody would ever purchase a computer or a mobile phone – one can always buy the equivalent product for a lower price in twelve months time, or a better product at the same price. Yet consumer electronics have boomed in recent years. Even if some people do delay making purchases, I would anticipate the economic impact from such choices being more than offset by increased consumer spending elsewhere as other people find they have a higher disposable income. I fear that the “spectre of deflation” argument could be used to justify further highly damaging and dangerous quantative easing, which would benefit small sections of society while damaging the general consumer – and yet again punishing the prudent savers who have been so disgracefully treated over the last six years.

    • A different Simon
      Posted December 17, 2014 at 6:16 pm | Permalink

      “…. as people put off making major purchases expecting prices to fall further.”

      That is one plausible explanation for the huge drop in the price of oil – speculation that the price of oil is going lower .

      I earn a OK’ish amount and endeavour to put money away for old age and that leaves me with not much capacity for discretionary spending .

      However , I’ve got a feeling that the people who are keeping retail alive are not earning anything like an OKish amount and consider saving for old age discretionary !

      There is going to have to be a heck of a rebalancing if auto-enrollment and compulsory pension saving redirects the money which for the past 20 years has imho been misappropriated by the mortgage lenders and retail into saving .

  30. waramess
    Posted December 16, 2014 at 6:10 pm | Permalink

    Interesting comments on the possibility of a western conspiracy however, if it was so easy then it would have happened long ago.

    Oil is subject to the laws of supply and demand and it was a great puzzle to many some years ago that the price held up through the recession when demand by industry had reduced.

    Whilst nobody is clear why the price has fallen so far many attribute its past price stability to QE when hedge funds piled into oil and other commodities as a hedge against a fall in the dollar.

    Now many have moved out of commodities and into the Yen/Dollar carry trade where there have been rich pickings as a result of the devaluation of the Yen.

    I think this is worth a mention because it shows what happens when a monetary bubble instigated by a Central Bank or government bursts ie so far a fall from $110 to under $60 a barrel.

    Maybe the bubble caused by the UK governments guarantee of residential house prices will cause a similar meltdown in which case a stress test of banks to see whether they can withstand a fall of 35 percent in property prices will prove quite inadequate.

  31. Jon
    Posted December 16, 2014 at 8:31 pm | Permalink

    There is an even bigger bear out there, we are more dependent on financial services, both down here and in Edinburgh, which it outstrips oil revenue for Scotland now and has in the past already. The war the EU rages against it and our ability to stem that will most likely be the deciding factor for me if we get the EU vote. Our regulators are bad enough.

  32. Lindsay McDougall
    Posted December 16, 2014 at 10:49 pm | Permalink

    It may be that the spirit that moved OPEC is collapsing. Perhaps the nations that can produce and distribute oil cheaply (e.g. Abu Dhabi, Qatar, Saudi Arabia) have decided that they want a bigger share of the world market at the expense of costlier producers (e.g. Scotland, Iran, Nigeria, Canada). Is Scotland’s North Sea oil still profitable?

    Another rumour I hear is that the Saudis want to put out of business the smaller US fracking companies. Will that work?

    • A different Simon
      Posted December 17, 2014 at 6:36 pm | Permalink

      It may well put banks out of business first . That would then put onshore exploration and production companies out of business .

      E&P companies borrow money against certified reserves to fund drilling .

      The lenders insist that the E&P companies hedge a proportion of their production , typically 75% on a tight rock oil well , at a price which ensures the loan will be repaid .

      The banks sold hedges at various prices eg 1 million barrels at $90/bbl ending 30/June/2015 .
      In such an example they were not expecting oil to fall below $75 for a worst case scenario of $15 payout per barrel .

      If the price drops further to $50/bbl oil , the banks are going to have to cover $40/barrel , i.e. 266% of the example worst case scenario they will have used for forecasting purposes .

      This is quite apart from all the bonds which were required to buy land , set infrastructure capex etc .

      What are the chances that all this paper got packaged up and sold to British banks ?

      As the value of reserves is reduced by the falling price of oil , there will be less capital to fund operations and service bonds and other debt .

      • Mark
        Posted December 18, 2014 at 1:21 pm | Permalink

        I suspect that producer hedges will have been sold by the banks at a nice profit to Big 6 UK energy suppliers who were frightened into buying extra coverage by Mr Miliband’s antics on price freezes earlier in the year. Since oil prices have fallen faster than gas, that means we’ll probably get another energy bill increase to cover the unexpected losses on the hedges. Other losers will be wealth funds who have used oil as a hedge against inflation and currency debasement.

  • About John Redwood


    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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