The World Bank has suggested that in the worst-case scenario, the conflict between Israel and Gaza could increase global oil prices by such a significant amount that oil might trade at a record $150 per barrel.
This might, of course, simply be scaremongering on the Bank's part. But, if this were to happen then there can be no doubt that the UK would, as oil importers, be importing inflation into this country, yet again.
The question arises as to what the appropriate response to this inflation might be. Unfortunately, it is very hard to imagine the Bank of England suggesting anything but its standard knee-jerk reaction in response, meaning that it would seek to increase interest rates yet again with the supposed aim of reducing demand within the economy. This policy would, however, be as inappropriate as the same policy has been since 2021. An increase in oil prices as a result of war does not indicate the presence of either excess incomes or demand within the UK economy; it instead suggests the failure of the global body politic to address or manage a situation that should have been on its agenda for resolution for a long time, and which it has ducked.
In that case, what else should be done?
Any politicians suggesting that there might be little that we could do except accept our fate would be very wrong.
Any politician also suggesting that the only appropriate response is for the UK to increase its oil production would be just as wrong: we can have almost no impact on the global oil price for the foreseeable future as a consequence, meaning that this would be an irrelevant argument.
Instead, the required responses have to build resilience in quite different ways. One way to do this would be to provide the support that this inflation would demand for those who are most likely to be impacted by it, who are those on relatively low incomes. So, pensions and benefits would have to be increased in line with inflation, and employers, including those linked to the government, must similarly be expected to deliver pay increases that would deal with any resulting price hikes. We cannot live through another cost-of-living crisis. That mistake cannot be repeated.
But more would be required from the government than that. It would have to signal that in a period when inflation is clearly beyond its ability to control that it would instead develop the competence to manage it and its consequences. The measures noted in the previous paragraph would be part of that process, but much more would be required.
There would be a need to stop the pretence that this is the most important economic issue within any economy, when it clearly is not. Maintaining economic activity is.
And there would be the need to avoid debt crises - meaning that managing the economy without hiking interest rates would need to be the required art so that the massive problems now arising in the UK as a result of increasing interest rates could be avoided if inflation emerges again.
Then there would be the need to focus on new narratives. The focus would not be on debt, which has the sole intention of limiting action on the part of government, which narrative would be replaced by a focus on what the government can do - including its extraordinary and unique ability to create the money needed to save the day when crisis hits - which does, however, need to be matched by taxation of wealth as it can otherwise lead to asset price inflation.
Finally, the focus must be on protection. In other words, the focus must not be on ending inflation but on making sure that those who have suffered because of it can recover from it and restore the position they were in before it. The need to do this is being totally ignored at present in the UK, and we will pay a heavy price for having done that.
It goes without saying, of course, that none of this can be done by a supposedly independent Bank of England.
The biggest question of all is whether anyone is contingency planning for this right now? I strongly suspect that they are not. And that worries me, a lot.
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The trouble is that the state seems to have failed and not have any sort of contingency planning
Intelligent, well informed people would be asking why we have to keep upsetting the people with all the oil to the point that it goes up to that price?
And why don’t we try to move away from such a dependence on it, if its being abused?
Oops – sorry – I’ve just woken up – I was dreaming. Sorry.
I’m dreaming too – could be the perfect opportunity to fund investment to make non-oil options financially attractive.
The thing I naively did not expect during the initial part of Putin’s illegal invasion of Ukraine was just what a negative effect it would have on the share prices of companies developing and producing green infrastructure. Because the oil price went up, institutional investment followed and my green portfolio tanked. Perverse incentives! We need to get our priorities right.
…..but what we’ll actually get is interest rate hikes.
“That mistake cannot be repeated” you say regarding another cost of living crisis, but you know fine well that in politics there is no such thing as a mistake that cannot be repeated. It won’t matter which party is in office, neither shows any indication that they will take back control of the BofE.
Our best hope is that the BofE is engaged in unfounded scaremongering.
If inflation rises as a result of this conflict, or any other reason, the PM will say he didn’t break his pledge to halve inflation because the rise was out of his control. The thing that boils by bladder is when he repeats his pledge to halve inflation, nobody follows up by asking what he is doing to halve inflation. Is it keeping wages nice and low, that will halve inflation? Fighting tooth and nail to avoid giving pay rises to NHS and other staff? Letting them get so desperate that they have no choice but to strike? Or will allowing bankers to get bigger bonuses solve the issue?
I would actually like to hear what he feels he has done to reduce inflation, but nobody asks him. I see inflation as being a mostly outside the government’s control, but I don’t really know if I’m being honest.
This comment is slightly beside the point of your article.
A hike in a key commodity that we import does make us poorer; we can’t pretend otherwise. In the longer term we can wean ourselves off that commodity but in the short to medium term we will be poorer. But how that cost is spread IS something government can control…… but chooses not to.
On the subject of monetary policy, a “thought experiment”. Just suppose VAT was raised from 20% to 25% – what would the correct monetary response be?
Prices would rise (ie. “inflation”) so surely the BoE would hike rates? Well, no – most would argue that the fiscal tightening implied by higher VAT should be offset by a monetary easing… which would be OK because the tax rise would be a one off that would drop out of inflation calculations in a year. This is a pretty standard analysis where countries (like Singapore) are gradually trying to raise consumption taxes.
Now think what an oil price hike looks like? Yes – rather like a tax hike (except the money sucked out of the economy goes to oil producing states rather than the government). However, from the perspective of delivering the correct policy to maintain domestic economic activity the response to an oil price hike to $150 should be a CUT in rates.
I agree with your conclusion
Energy sovereignty (control over our own energy supply) would seem to be desirable for any country.
Yet every government seems to lean towards being reliable on other country’s energy.
It could have been different, but I guess politicians are easy to buy off.
As a highly import dependent country, particularly so for commodities such as oil, then raising the base rate would be regarded as rational by the BoE. Assuming it creates a positive differential with base rates in other countries, it acts as an incentive for the owners of hot money to maximise their return by holding their wealth in Sterling rather than another currency. In turn, this drives up the exchange rate and reduces the price of imports, such as oil. In short, it acts as a way to limit cost push inflation pressures.
It takes at least two years to work, by when the crisis would be over.
Meantime there would be a likely-permanent upward shift in earnings and wealth profiles.
Do you always look at the world through wealth tinted glasses?
“It takes at least two years to work, by when the crisis would be over”….The transition to zero carbon, away from relying on burning oil, will probably take 15 to 20 years. To keep the economy running for this ‘transition period’ requires plentiful ‘cheap’ oil. It appears the Tory comedians in power are planning to allow continued use of oil with carbon capture even in 20 years time. Hopefully they won’t be in power then.
I am not sure we need plentiful cheap oil
We need the minimum possible