The Bank of England has dramatically upgraded its UK growth predictions. Just like HM Treasury, the International Monetary Fund and all those other official bodies that took an astonishingly pessimistic view of Brexit, the “Old Lady of Threadneedle Street” has somewhat changed her tune.
Ahead of last June’s referendum, Bank Governor Mark Carney warned of “a technical recession” – two consecutive quarters of shrinking GDP – if we voted to leave the European Union. Even in August, as the economy remained buoyant despite the Brexit result, the Bank was forecasting growth of just 0.8pc in 2017.
“In the absence of a major financial meltdown, oil will end 2016 north of $60 a barrel.” So stated this column at the turn of the year – a forecasting flourish possibly fuelled by one Christmas brandy too many.
Back then, in early January, having plunged all the way from $115 in mid-2014, Brent crude was trading at $37 a barrel. In February, oil fell again, going below $30. At that point, my $60 prediction looked silly.
In the absence of a major financial meltdown, oil will end 2016 north of $60 a barrel,” this column stated at the turn of the year. It was a forecasting flourish possibly fuelled by one Christmas brandy too many. With just four months of 2016 to go, though, I’m sticking to my Yuletide view.
Attempting to predict the oil price is crazy. Yet no decent economist can afford not to. The world economy still revolves around oil – used in everything from transport and electricity generation to the production of plastics, synthetics and so much else. And for all the breathless talk about renewables, and the grim inevitability of growing nuclear dependence, we remain addicted to oil.
“In the absence of a major financial meltdown, oil will end 2016 north of $60 a barrel,” wrote this columnist in early January. I’m sticking to that view. Having sunk to a 13-year low in mid-February, crude prices have since risen by more than 80pc – and last week broke through $50 for the first time since last November.
This significant oil price rise is happening, though, despite and not because of the once all-powerful Opec exporters’ cartel. But that’s not stopping Opec from trying to reestablish itself as the supply-limiting force it once was.
What are we to make of last week’s deal to freeze oil output between Saudi Arabia and Russia – the world’s two leading crude exporters? Is it significant and is the price of oil now likely to rise?
This agreement is remarkable in the sense that there typically isn’t much love lost between Riyadh and Moscow. While Saudi has traditionally been the beating heart of Opec, Russia has always sat staunchly outside the 56-year old oil exporters’ cartel, just like the Soviet Union before it. The fact that the Desert Kingdom has long been a US-ally (albeit to varying degrees) has also helped stoke Russo-Saudi tensions.
The oil price collapsed last Monday after an acrimonious meeting of the Opec exporters’ cartel. Having been above $105 a barrel as recently as June 2014, US crude fell to $37.65. That represents a 64pc drop in just 18 months – to the lowest level since the worst of the global financial crisis in February 2009.
Oil plunged again last Thursday, moving below $37 – amid further evidence that Opec’s 12 member states, from the mighty Saudi Arabia to tiny Ecuador, are cracking up. After staying well above $40 a barrel for months, crude has now crashed decisively through that psychological lower bound. Now it’s been breached, there’s widespread speculation crude could tumble much further – maybe even as low as $20.
Only a fool or a liar claims to know where the oil price is going. I like to think I’m neither – although some may disagree. While predicting the future path of crude is almost impossible, the oil price remains the most important economic variable on earth.
So, despite the pitfalls, any self-respecting economist needs to take a view. Mine is that oil is priced some way below its fundamental value, and has lately been artificially deflated by a soaring dollar and excessive fears the Chinese economy is about to implode, based on the dramatic volatility of its relatively small but highly visible stock market.
What are we to make of the UK’s ultra-low inflation rate? I think it should be viewed as good news – at least, on balance. We should remember that while low inflation feels nice, the main reason it’s happening isn’t necessarily beneficial to the UK economy as a whole. The recent collapse in oil prices puts a bit more money in our pockets, but it’s jeopardising our North Sea operations, one of the UK’s most important industries.
Above all, our reaction to low inflation, mustn’t dissolve into some kind of “deflation panic”. The zombie bankers, share-boosters and government debt junkies would then use it as an excuse for another round of mega-money-printing by the Bank of England, euphemistically known as quantitative easing. That would be seriously counter-productive – and must be avoided.
Attempting to forecast the oil price is a mug’s game. But that hasn’t stopped me in the past (ahem!) The reality is that crude is so important to modern life, and the path of the global economy, that for all the pitfalls of prediction, any serious economist needs to have a view on the future cost of the black stuff. Pivotal not just in terms of energy and transport, but also the manufacture of vital inputs from polymers to fertilizers, the dollar oil price is perhaps the world’s single most important economic variable.
My view is that the current price dip is temporary, partly illusory and that oil is now heavily over-sold, having fallen way below its fundamental value. As such, I’d venture that, in the absence of a 2008-style systemic meltdown on global markets, $100-a-barrel oil will return by the middle of 2015.
I’ve been reading “A Line in the Sand”, a riveting book by James Barr. It’s about the incredible manner in which the British and the French re-made the map of the Middle East during and after the First World War. Barr tells a sordid tale of hubris and eye-popping political skullduggery, as two colonial powers cooked up the Sykes-Picot Agreement of 1916, dividing Le Moyen Orient along a line drawn from the Mediterranean to the Persian frontier.
This book is vital reading, not only for the author’s gripping portrayal of high politics, intrigue and espionage, involving the likes of Lawrence of Arabia, Churchill and De Gaulle. The story also has deep contemporary relevance. For the Middle East’s colonial boundaries now look under severe threat, as the region is convulsed by a renewed outbreak of intra-Islamic conflict.