Oil is something of a “Goldilocks” commodity.
Too high a price, and the advanced economies suffer through inflation and depressed purchasing power for their workers. If the oil price goes too low, we fret about destabilising oil exporters who need no further destabilisation, such as Russia and Iran. There may be some “just right” position in between, where the world can relax, but no economist has yet satisfactorily determined that universally beneficial price level.
In the case of Britain, apart from the special circumstances of Scotland, the lower the oil price, within very wide margins, the better. Although richer in energy resources than, say, Japan, the UK remains a nation dependent on trade, industry and commerce to make a living in the world, rather than natural resources. In other words, we do best by having cheaper energy all round.
It will take some months to feed through fully, but some beneficial effects are already clearly visible to consumers, not least motorists who have enjoyed some respite from ever rising fuel bills. Scotland’s Treasury stands to lose some oil revenues if “devo max” takes effect, but will benefit far more from healthy trading conditions in the rest of the UK and Europe.
More broadly, the lower oil price – and softening commodity prices generally – will feed through to lower inflation next year. As gold, silver, platinum, sugar, cotton and soybean costs subside, so will the cost of food, clothing and much else. The tiny improvement in real-terms wages seen recently may become more marked. The Bank of England, seeing inflation declining by more than expected, may feel more relaxed about keeping interest rates at historic lows. That will benefit home buyers who might otherwise have seen a rise in their monthly mortgage bill.
The economy most visibly disrupted by the decline in oil and gas prices is, of course, Russia. President Vladimir Putin’s press conference the other day was hardly a reassuring display of statesmanship; the “bear” as he styles his country is apparently being shackled and cribb’d by Western powers solely intent on further humiliation for Russia. As the Russian people face rising inflation, a collapsing currency, a slump and a vicious squeeze on living standards, this may be the best line Mr Putin has, but it certainly does not deserve to convince anyone that his economic policies have been anything other than a dismal failure.
Far too dependent on natural resources, Russia has left it too late to diversify, modernise and reform her economic structures. Soon, Russia may not be able to afford to wage any more of her little wars.
For America, too, it is a mixed blessing, and the US has been something of a player in this switchback in energy prices. In the supposed battle between Saudi Arabia’s oil wells and American discoveries of shale gas, it is the Americans who are outstripping the Arab world in productive activity. Yet too low an oil price – in this Goldilocks world – makes shale gas and fracking less attractive to developers, handing advantage back to Opec, which may be why Saudi Arabia has been so accommodating. That said, energy security – long an American ambition – seems to be becoming more of a reality.
So, an unexpected turns of events for a world grown accustomed to oil at well over $100 a barrel. No one will be more relieved than the Chancellor and his colleagues in government. The “cost of living crisis”, if not actually over, is certainly a less potent political slogan than when Labour first came up with it. All in all, the $60 barrel of oil makes for a fine Christmas present for George Osborne.