Jeremy Warner's Outlook: With utility bills likely to rise another 30-40 per cent, oil still has the power to shock

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The Independent Online

Oil prices again hit new records yesterday, making the once implausible Goldman Sachs forecast of a "super-cycle" that would drive them to $200 a barrel or more seem alarmingly credible.

They also provide a major headache for the Bank of England's Monetary Policy Committee, which meets this week for its monthly deliberations on interest rates. The fast slowing economy would argue for another cut, as indeed in some respects would the deflationary effect of higher energy prices.

More money spent on petrol and utility bills means less for other things at a time when credit is no longer available to mitigate the consequent squeeze on disposable incomes. Unfortunately, higher oil prices also add to inflation. Whereas the current inflationary spike was expected to ease by the second half of this year, this now looks much less certain.

Next week's Quarterly Inflation Report is likely to point to a worsening medium-term outlook for inflation. Energy retailers are already warning that unless the oil price eases soon, consumers should brace themselves for gas and electricity prices some 30 to 40 per cent higher going into next winter than current, already inflated levels.

The Government is powerless to prevent these rises, despite the clear political damage it is doing to Labour at the ballot box. Retail prices are determined by the wholesale market. If Britain isn't prepared to pay the market price, the oil and gas will simply go somewhere which is.

Subsidising energy prices through the public purse, as occurs in some countries, is not a realistic option for Britain. Higher utility bills might be painful to electoral prospects, but it is still better that the big, bad oil and utility companies get at least some of the blame than that the Government gets all of it by raising taxes to pay for a subsidy.

Meanwhile, virtually everything else seems to be going up in price too, from food to mortgages, and thanks to the weak pound, even flat-screen TVs and cheap clothing from China. There is only so far retailers can go in protecting the public from these inflationary shocks by absorbing the effect in their profit margins.

About the only thing not inflating merrily away is wages, which though a consolation for the MPC, encouraging it to believe there will be no second round inflationary effects from oil, food and goods, looks like a sick joke to everyone else. Disposable incomes seem ever more squeezed.

The Government's ineffectual approach to energy policy hardly helps matters. Instead of focusing in a timely fashion on the likelihood of looming energy shortages, it instead concentrated on socially meaningless targeting of so-called "energy poverty". Steeply rising utility bills have blown out of the water any hope ministers might have had of achieving these goals.

One positive to come out of high energy prices is that they force households to reduce their consumption. According to data from Centrica, in the 1970s the average temperature of a British house over the year was 12 degrees. Today it is 19. Yet though it is relatively easy to cut back on the first 10 per cent of consumption, it becomes much tougher thereafter, requiring significant investment in energy-saving materials and devices.

The Government might also be faulted on the way it has chosen to meet emission reduction targets and, in particular, its target of 20 per cent of supply from renewables by 2020.

The target implies massive investment in wind power in a manner which will require equally substantial subsidy, either through prices or directly from the public purse. More pain, then, for the beleaguered householder. Is this really the most cost effective way of achieving the desired reduction in emissions? It seems ever more questionable.

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