Monday, 27 February 2012
Oil at $150?
Back home we can already feel the heat of this growing threat. Iran supplied UK diesel through a circuitous route and this can be seen in eye-watering pump prices of nearly £1.45 a litre - not long a this rate until it is £100 to fill up your car.
Reality will really hit home if this cold war turns hot. closing the straights of Hormuz will cause a massive speculative increase in the price of oil - yes, it may come down as speculators quickly look to book profits, but a Middle Eastern war is the last thing the Western, or indeed Global, economy needs.
In the past oil at over $100 has brought recession, look at the Reuters graph above, prices near $100 are highly correlated with recessions. Let alone $150 - let's think what this might mean for the UK and eurozone alone.
Firstly, straight back into real recession is nailed on - probably at least a full 1.0% off GDP which is already flat - maybe as much as too. Same for the Eurozone. As far as our debt dynamics are concerned, this means major misses to the fiscal consolidation programme - offset a little by the high inflation such a move will cause. A Classic stagflation scenariom, nasty. The Tories could certainly kiss goodbye to hopes of winning the next election.
On our already weak UK economy though, the blow is will be felt fairly badly. Let's face it nearly all consumer goods are either made of oil or packaged in it, some powerstations are oil fired - it will be messy across the board in terms of sector performace.
Worse, as an external shock there is nothing we can really do to prepare for it as a Country - except that with high oil taxes we are at least inured to high prices more than say the US or Spain, but not enough to offset much of the pain.
Politically the showdown with Iran has to come sooner or later, although an Arab Spring type event would be much more welcome. Economically, we just can't afford it in the next 3 years. I wonder how these trade-offs are playing out in Whitehall and Washington - we'll soon find out.