What to expect as oil gets dearer

Oil has risen by about 30% in just a few weeks. Matthew Lynn looks at the potential consequences of a higher oil price.


If the oil price keeps rising, expect lots of crowing speeches from Nicola Sturgeon

Was that the shortest bear market in history? A few weeks ago the oil price was said to be heading down to $20 a barrel, or even less. The glut of oil would only increase as Iran rejoined the global economy, Saudi Arabia kept pumping furiously, and we would all go out and buy electric cars, slashing demand. Yet, in the background, the oil price has been quietly going back up and rapidly. From a low of $28 in January, Brent crude has rallied to $40. That's a rise of about 30% in just a few weeks.

Of course, it may not last. But if oil has turned a corner, and if it is going to get back to a more reasonable long-term price, which might well be in the $40 to $50 a barrel range, then that will surely have a huge impact on the global economy just as it did on the way down. Here are four potential consequences of a rising oil price.

First, expect inflation to start rising again. The collapse in the oil price is one reason we have had deflation, or incredibly low inflation. Most obviously, the cost of filling a car has fallen. But it also feeds into the price of everything else just about anything we buy needs energy to produce and transport, and even service companies have to heat their offices. If the price starts rising again, that will start driving prices up right across the economy. If inflation does get back to, say, 2.5% that is, slightly more than its 2% target rate the Bank of England might finally feel brave enough to put a quarter point on rates. Second, get ready to see weaker consumer spending. Cheap petrol has fuelled a mini-boom in retail sales as people have more cash left over in their pockets after petrol and heating bills. That has been one reason why sales in the shops have been a bit better than anyone expected even Tesco managed to report more hopeful numbers recently. But if that goes into reverse, retail sales will be the first to get hit. Time could well be up for many high-street chains that are already struggling.

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Third, we will see resurgent emerging markets. These commodity-dependent markets have been hit hard by the collapse of oil and other raw materials, and their growth has slowed sharply. Investors who backed them have under-performed over the past couple of years. If more expensive oil also feeds through to higher commodity prices, those countries will stage a rapid comeback. Russia will be out of a recession and growing at a decent clip. So will the Gulf. Iran will be rejoining the global economy at just the right time. Even Venezuela will look better. Once that happens, investors will get interested again in these cheap-looking markets.

Fourth, expect to see resurgent Scottish Nationalists. I hate to be the bearer of bad news, but there is no getting away from it. If the oil price keeps rising, expect lots of crowing speeches from First Minister Nicola Sturgeon about how Scotland's economy is strong again and its booming oil industry will generate enough tax revenue to pay for magnificent public services, just so long as the English aren't taking it all. It might even lead to another vote on independence. Of course, at the last referendum the SNP campaigned on the assumption that oil would cost $100 a barrel. Yet this has never been a party to allow small things such as reality to stand in the way of a good argument.

Of course, the fundamentals are still stacked against oil shale means there is a lot more supply, and huge investment in renewables and energy efficiency may permanently reduce demand. But that doesn't mean a price of $50 a barrel is unsustainable and that the markets have undershot badly in the last few weeks. The fall in the price of oil was the big theme of 2015. The rise, if it is sustained, may well turn out to be the big theme of 2016.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.