[A-List] UK economy: the oil price spectre

["Michael Keaney" <michael.keaney@xxxxxx>]

Something that Elliott forgets to mention -- he would, since he is an
adviser to the David Owen anti-eurozone membership campaign -- is that
staying out of the eurozone is going to punish the British even further,
given the likely depreciation of the pound relative to the price of oil and
the cost (in high interest rates) in supporting an overvalued pound.

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Oil prices have Blair over a barrel

The economic fallout from Iraq is now a threat to Labour's future

Larry Elliott
Thursday May 13, 2004
The Guardian

Air fares are up. Petrol prices are up. The leaders of the fuel protest in
2000 have been making minatory noises. None of this was in the script a year
ago, when George Bush was boasting of final victory in Gulf war 2, so it is
hardly surprising that Tony Blair is concerned about rising oil prices. With
the £4 gallon in prospect for motorists, he's a worried man. For the first
time, there is evidence that the ripple effects from the mess in postwar
Iraq are lapping up on the shores of the domestic economy. And for a prime
minister counting down the days to a general election, that's not good news.

Understandably, the economic effects of the war have attracted scant
interest over the past couple of weeks as Bush and Blair have floundered
around in response to the revelations of torture by American and British
troops in Iraq. The worsening political and security situation has, however,
made both leaders more vulnerable to the most obvious consequence of
instability in the Middle East - a higher oil price. Over the past month,
the price of a barrel of crude in New York has risen to just under $40 a
barrel, leading some economists to predict pump prices in the UK could rise
by 10% over the coming weeks.

If you take the official statements from Washington and London at face
value, Bush and Blair ought to consider this a price worth paying. They went
to war because Saddam Hussein was thoroughly wicked; the conflict had
nothing - absolutely nothing - to do with the fact that Iraq has the second
highest levels of oil reserves after Saudi Arabia and that global stocks of
easily obtainable crude are diminishing.

If you believe that, of course, you'll believe anything. It beggars belief
that an oil president from an oil state surrounded by former oil executives
paid no heed to the west's strategic interests. Certainly the idea that
Saddam posed a threat to the west's economic security was a lot more
credible than the notion that he posed a military threat.

And, naturally, there were sighs of relief all round when the immediate
impact of war was positive for the global economy, prompting lower oil
prices and a recovery in share prices and business confidence. Victory
removed the uncertainties created by the long build-up to war.

Now it's a rather different story. Iraqi crude exports were disrupted last
weekend by sabotage to a pipeline carrying oil to the key loading terminal
at Basra, target of failed suicide bomb attacks two weeks ago. There are
fears about the rise of Islamic fundamentalism in Saudi Arabia, the world's
biggest oil producer and traditionally a staunch ally of Washington. Far
from making oil supplies more secure, the events of the past 12 months have
raised concerns that supplies could be disrupted at a time when global
demand is high and rising. Limited supplies plus higher demand mean only one
thing: prices go up. That's why crude is at $40 a barrel.

Bush and Blair know their history. There have been three global recessions
in the past 30 years, and all of them were pre-dated by a sharp rise in oil
prices. Britain and the US may be able to weather the storm better this time
because lower levels of inflation mean that there is less pressure to push
interest rates up to cripplingly high levels, but there will still be a
dampening effect on living standards and growth.

A second problem - and this applies to Britain especially - is that even
before oil prices began to rise, the war in Iraq was crowding out good news
on the economy. With a year to go before the possible date of the election,
Labour ought to be banging on nonstop about yesterday's fall in jobless
claimants to the lowest in almost 30 years and the longest period of
sustained growth since the industrial revolution. Worryingly, a poll in the
Times this week showed the economy well down the list of voter concerns.
Even worse, the collapse in trust in the government over Iraq has spawned
cynicism about claims that Gordon Brown's billions are making a difference
to public services. Given that investment in schools and hospitals was the
centrepiece of Labour's domestic agenda for the second term, this is
unhelpful, to say the least.

Up until now, however, the war has at least been kept discrete from the
economy. Labour's strategists have comforted themselves that once the
political agenda can be prised away from Iraq and on to "bread and butter"
issues, the strength of the economy will prove decisive. The nightmare
scenario for Blair is that voters blame the mess in Iraq for higher prices
at the petrol pumps, dearer air fares and - depending on how policymakers
respond to a rise in oil prices on inflation - higher interest rates. Labour
is expecting a pasting at next month's local and European elections, but
will put defeat down to a protest vote. This argument will be tested fully
over the coming months should oil prices remain at $40 a barrel. If they do,
recapturing support of lost voters will not be easy.