03 June 2004 18:55
Leading article: Oil prices: Fuelling the crisis
Surging oil prices have suddenly become an embarrassing political problem for the government. But they are also a
medium-term danger to the economy. The political problem was highlighted yesterday by Michael Howard's apparently
uncontrollable addiction to hitching a ride on every passing populist bandwagon. This time the Tory leader is battening
off tabloid discontent that the surge in world oil prices (despite a recovery yesterday) will be aggravated in September
by implementation of the budget increases in duty on sulphur-free petrol of 1.42p per litre and 0.5p a litre more for
ultra-low petrol. The fuel protest lobby led by David Handley, of Farmers for Action, has ludicrously given the
chancellor only days to take action. (Perhaps he should consider how far taxation of this kind goes to pay the subsidies
on which many farmers depend.) Mr Howard, while not endorsing any particular action, has said he would back
demonstrations against higher prices "as long as they were peaceful and within the law". He claims,
disingenuously, that the fuel rise "would cause great hardship to many people". The modest increases - which
merely keep prices unchanged after allowing for inflation - are small in relation to the rises in world prices, which
are outside even Mr Brown's control. But the chancellor may yet be forced to abandon, or at least postpone the
rises, to prevent the issue escalating.
Much more important in the long run is what happens to oil and other commodity prices - which are also rising
sharply. It is imperative to prevent a recurrence of the quadrupling of crude oil prices in the early 1970s that ushered
in nearly two decades of high, and highly debilitating, inflation from which the world economy has only recently
escaped. Although developed economies use oil much less intensively than they did then, it is still a vital input. The
International Energy Agency reckons that a $10 a barrel increase knocks 0.4% off economic growth and adds 0.5% to
consumer prices in OECD countries. The effect on developing countries, especially those without oil reserves of their
own, is worse still, as they use more energy than rich nations and use it less efficiently. If the price of oil stays
around the recent peak of $40 a barrel, the world economy would muddle through with mildly reduced growth and higher
inflation. But the deeper fears arise not from a current shortage of oil but from the nightmare scenario in which Saudi
oil production (10% of world output) is taken out by a terrorist attack or a regime change. This has moved from being
fanciful to quite possible. In theory, even a 10% fall in output need not have a catastrophic effect because part of the
gap could be made up by increased output elsewhere (Russia and, fingers crossed, Iraq) plus urgent conservation measures
within consuming countries.
But that does not take full account of the destructive effect that rocketing oil and commodity prices would have on
fragile consumer confidence, especially in the UK. As yesterday's figures implied, consumer debt in Britain has
probably now reached pounds 1 trillion for the first time. Although this is backed by nearly pounds 3 trillion of assets
(mainly houses), those assets are not usually held by those most seriously in debt. If the Bank of England were forced
to raise interest rates sharply in order to prevent exploding commodity prices from pushing inflation above its
mandatory 2% target, then consumer confidence could be shattered and even house buyers, unable to service the debts on
their recent mortgages, would have to accept that the party was finally over. Britain's economy has done remarkably
well in recent years. But it remains as vulnerable as any other economy to a sudden external shock. That has not
happened yet. It is, sadly, a much less distant threat than it was a year ago.
[The Guardian] |
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