Oil barrels. Photo: Miguel Gutierrez/AFP/Getty Images
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Your petrol bill may fall, but is cheap oil all good news?

The falling oil price may sound like a positive thing, but it follows a series of worrying events in global economics.

he past few months have brought a spree of frightening developments in the global economy. There’s been the slow crash of the Chinese property market, the eurozone’s slide into deflation and the relentless strengthening of the US dollar, to start us off. But there is no doubt what the biggest and most baffling development of all has been: the collapse in the price of oil, from more than $100 per barrel as recently as last September to less than $50 per barrel today.

Oil, it goes without saying, is the single most important commodity there is. Quite literally, it greases the wheels of the global economy. It is a commodity that is unequally distributed: a few countries have a lot of it – the Saudi Arabias, Russias and Venezuelas of the world – while most countries have none. Some have about enough for their needs (notably, these days, the US) but most have to import almost everything. It’s no surprise that the price of oil is one of the critical drivers of both the rate of global growth and the way it is shared between nations.

So, why has the oil price collapsed and what does it mean for the world economy? The answer to the first question is easy: nobody really knows. Since the 2008 financial crisis, people have become used to the idea that economists are useless at predictions. The number of analysts who warned that the growth of credit in the mid-2000s was not sustainable can be counted on two hands. The number that got the timing right can be counted on one. But the number of analysts who predicted the collapse in oil is even smaller. As far as I can tell, it was approximately zero.

Of course, after the event, all kinds of plausible explanations have been on offer. The simplest is that this kind of price action is typical of any commodity investment cycle. The capital equipment required to extract oil on a large scale is vast and costly and it takes years to install. When prices are high, as they were until recently, governments and companies compete to plough billions of dollars into rigs and pipes. The result is a glut of investment, followed by a glut of supply when the new kit comes on stream. And so the price collapses, leading to frantic cost-cutting and a dearth of new investment – sowing the seeds for the supply shortage that will kick-start the next cycle.

It’s a neat enough theory in general, and yet its very neatness raises the question of why no one saw the latest price crash coming. Few of the relevant investment plans were secret, after all, and there is a huge and profitable industry devoted to speculation on the price of oil – with every incentive to find them out.

Naturally, there are other explanations: conspiracy theories about the Saudis and Americans conniving to hurt the Russians, or the Saudis going rogue in order to hurt the Iranians – but the speed of the collapse suggests it may have as much to do with a sudden drop in demand as a sudden glut of supply.

What will the collapsed price mean for the global economy? For many, the answer is that oil producers will suffer nasty recessions – but their suffering will be far outweighed by the boost to growth in oil-consuming countries. If, however, the collapsing price reflects weak demand from the eurozone, China and the rest of the emerging markets, the result may not be so palatable.

Certain market prices have an uncanny knack for foretelling economic weakness in the short term. For instance, is it a coincidence that the price of industrial metals such as copper – “Dr Copper”, as it is known on the financial markets, for its supposedly prodigious analytical powers – is also on the slide? Even more ominous is that the oil price drop has been accompanied by a steep decline in the interest rates that the world’s investors demand in order to lend to governments. When the UK government can borrow for five years at 1 per cent and Germany at less than zero (you read that right: investors are currently paying the German government for the privilege of lending to it), it does not suggest great confidence in the future of the economy.

At a conference a few years ago, someone in the audience asked me what would happen when the Bank of England eventually put interest rates up again. Like any economist, I gave a long, rambling and non-committal answer. When I had finished, the excellent compère turned to the crowd and said: “Let me put that a bit more simply: it means your mortgage will get more expensive.”

I know how he would summarise the effect of the current collapse: “It means your petrol bill is going to get cheaper.” Unfortunately, it may mean a lot more than that.

Felix Martin is a macroeconomist, bond trader and the author of Money: the Unauthorised Biography

This article first appeared in the 23 January 2015 issue of the New Statesman, Christianity in the Middle East

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Voters are turning against Brexit but the Lib Dems aren't benefiting

Labour's pro-Brexit stance is not preventing it from winning the support of Remainers. Will that change?

More than a year after the UK voted for Brexit, there has been little sign of buyer's remorse. The public, including around a third of Remainers, are largely of the view that the government should "get on with it".

But as real wages are squeezed (owing to the Brexit-linked inflationary spike) there are tentative signs that the mood is changing. In the event of a second referendum, an Opinium/Observer poll found, 47 per cent would vote Remain, compared to 44 per cent for Leave. Support for a repeat vote is also increasing. Forty one per cent of the public now favour a second referendum (with 48 per cent opposed), compared to 33 per cent last December. 

The Liberal Democrats have made halting Brexit their raison d'être. But as public opinion turns, there is no sign they are benefiting. Since the election, Vince Cable's party has yet to exceed single figures in the polls, scoring a lowly 6 per cent in the Opinium survey (down from 7.4 per cent at the election). 

What accounts for this disparity? After their near-extinction in 2015, the Lib Dems remain either toxic or irrelevant to many voters. Labour, by contrast, despite its pro-Brexit stance, has hoovered up Remainers (55 per cent back Jeremy Corbyn's party). 

In some cases, this reflects voters' other priorities. Remainers are prepared to support Labour on account of the party's stances on austerity, housing and education. Corbyn, meanwhile, is a eurosceptic whose internationalism and pro-migration reputation endear him to EU supporters. Other Remainers rewarded Labour MPs who voted against Article 50, rebelling against the leadership's stance. 

But the trend also partly reflects ignorance. By saying little on the subject of Brexit, Corbyn and Labour allowed Remainers to assume the best. Though there is little evidence that voters will abandon Corbyn over his EU stance, the potential exists.

For this reason, the proposal of a new party will continue to recur. By challenging Labour over Brexit, without the toxicity of Lib Dems, it would sharpen the choice before voters. Though it would not win an election, a new party could force Corbyn to soften his stance on Brexit or to offer a second referendum (mirroring Ukip's effect on the Conservatives).

The greatest problem for the project is that it lacks support where it counts: among MPs. For reasons of tribalism and strategy, there is no emergent "Gang of Four" ready to helm a new party. In the absence of a new convulsion, the UK may turn against Brexit without the anti-Brexiteers benefiting. 

George Eaton is political editor of the New Statesman.