We have a new oil price crisis. It is, of course, thanks to Donald Trump and his Iran manoeuvring. As the Guardian has noted, this is the move in oil prices:
The FTSE celebrated:
And so let's talk this through.
First, oil is worth no more now than it was. Nor will the world go without it. One has to wonder just how much Trump has been motivated by a desire for market manipulation: he'd claimed rising stock markets were a sign of his virility: this action has given them life again. The Trump boom is back.
Second, this will be inflationary. It has to be: oil underpins the price of too many products. There will be quite a quick upturn in prices if this continues.
Third, that means more pressure on most households were the margins between income and spending are low, especially as consumer credit is not as readily available as it was (which is both a good and bad thing, depending on perspective).
Fourth, the reaction from those regulators who think inflation only comes in one variety, and must always be tackled by interest rate rises, even when they have no chance of addressing the cause of the inflation, will be demanding increases in bank base rates.
Fifth, this too will be inflationary in practical terms: the cost of living will rise. Consumption will fall further.
Sixth, already flatlining economies will be at risk of recession.
And a vicious cycle will be created, although stock markets might well rise further for a bit: those with money can generally be blindsided to longer-term risk for a while and make short-term gains until reality comes crashing in on them.
Of course, Trump may in some way ease the pressure on oil markets, but that seems unlikely: there is little gain to him from doing so. The cost is to all the rest of us.
Don't be confused by stock market reaction in that case: there is only a downside in what is happening right now. I stress, that's not because we don't want oil to be left in the ground: we do. But what we do not want is the reaction that this current move in price will create.
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You’re on a roll, Richard. So much to blog about. I wish it wasn’t necessary.
So do I !
I have little doubt that the ramping up of tension in Iran, by tightening sanctions is driven mostly by the interests of the US oil industry.
How it plays out and how high the increase in prices goes will depend to a large extent on the reaction of the Saudis (and OPEC). The Saudis have an optimum price and the suggestion is that $80 is well to the top end of the range, possibly over it.
US frackers need it to stay high.
As you say there is only downside for most of us. The sub plot (or even underlying rationale) of creating consumer price inflation will provide the excuse needed to justify hiking interest rates.
Quite why Jeremy Powell can’t see the folly of that is mysterious to me. But then maybe he is a disaster capitalist on a mission. The vulture capitalists will be licking their lips (or the avian equivalent) at the prospect of a glut of corporate casualties to be snapped up at bargain basement prices.
The big boys have the crash pencilled-in for the latter half of 2019 apparently. And they should know; they are manufacturing it.
The elephant in the room is Russia, and their desperate need to keep oil prices high enough to give a restive population the illusion of prosperity, while siphoning off almost all the money into oligarchs’ bank accounts…
…And siphoning ever such a little bit into the politics, and the politicians, of other countries.
Food prices may well be going stratospheric soon enough anyway due to the maunder minimum related crop failures. This won’t help matters…
The POTUS was elected on amongst other things: the stock market is a big fat ugly bubble; employment numbers are phoney. He now owns the market and the wonderful economy. We have similar numbers. And belieVe or not were going to have a Credit that’s good for Britain (not). The yield on the FTSE is just above risk free 10 year gilts and and our employment numbers are also phony. The top three yielders are HSBC and two Oilers. Surely nothing can go wrong.
Sooner or later, there will be an oil price event – a spike or a collapse – which ends the dollar denomination of the oil market.
This benefits the USA.
The effect of dollar-denominated oil, for every other country on Earth, is that an oil price spike more than an inflationary shock: it’s a currency shock, a de facto devaluation in favour of the USA.
Trump is to dim to understand that; in fairness, so are all but a handful of his fellow-citizens of the United States.
This is an important economic buffer for America, and they will regret it when it’s gone.
Meanwhile, the decline of Saudi Arabia’s ability to enforce the OPEC quota and keep prices artificially high is a double boon to our economy: prices are generally stable, and reflect production costs, gradually rising as the partially-depleted wells become increasingly expensive to pump.
This means that the long investments necessary for a post-oil world are economically viable, much to the benefit of us all.
‘Us’, that is, except for a handful of billionaires and oligarchs who need to sell the last few million barrels of the stuff and spend the proceeds on acquiring and consolidating a formidable political power.
That is at the root of Russian and American foreign policy towards the Middle East, and we would all do well to bear in mind that it runs contrary to our best interests, and is accompanied by an irrational appetite for risk.
As you say “I stress, that’s not because we don’t want oil to be left in the ground: we do.”
UK could and should push much harder towards oil independence. In the long term, the oil price is only heading one way, and the price of solar and wind energy are going in the other direction, but there is work to be done, especially on storage.
UK has the knowledge base but political leadership lacks vision, so we will miss this technology wave as well.
Agreed
It’s a pity that you are not a betting man willing to put your money where your typing fist is.
The suppliers of oil are going to be more interested in getting your money, and I would bet rather a lot that the price will cross the $75 level going down sooner than it crosses the $85 level going up.