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.

Macroeconomist, bond trader and author of Money

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

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Commons Confidential: Fearing the Wigan warrior

An electoral clash, select committee elections as speed dating, and Ed Miliband’s political convalescence.

Members of Labour’s disconsolate majority, sitting in tight knots in the tearoom as the MP with the best maths skills calculates who will survive and who will die, based on the latest bad poll, observe that Jeremy Corbyn has never been so loyal to the party leadership. The past 13 months, one told me, have been the Islington rebel’s longest spell without voting against Labour. The MP was contradicted by a colleague who argued that, in voting against Trident renewal, Corbyn had defied party policy. There is Labour chatter that an early general election would be a mercy killing if it put the party out of its misery and removed Corbyn next year. In 2020, it is judged, defeat will be inevitable.

The next London mayoral contest is scheduled for the same date as a 2020 election: 7 May. Sadiq Khan’s people whisper that when they mentioned the clash to ministers, they were assured it won’t happen. They are uncertain whether this indicates that the mayoral contest will be moved, or that there will be an early general election. Intriguing.

An unguarded retort from the peer Jim O’Neill seems to confirm that a dispute over the so-called Northern Powerhouse triggered his walkout from the Treasury last month. O’Neill, a fanboy of George Osborne and a former Goldman Sachs chief economist, gave no reason when he quit Theresa May’s government and resigned the Tory whip in the Lords. He joined the dots publicly when the Resolution Foundation’s director, Torsten Bell, queried the northern project. “Are you related to the PM?” shot back the Mancunian O’Neill. It’s the way he tells ’em.

Talk has quietened in Westminster Labour ranks of a formal challenge to Corbyn since this year’s attempt backfired, but the Tories fear Lisa Nandy, should the leader fall under a solar-powered ecotruck selling recycled organic knitwear.

The Wigan warrior is enjoying favourable reviews for her forensic examination of the troubled inquiry into historic child sex abuse. After Nandy put May on the spot, the Tory three-piece suit Alec Shelbrooke was overheard muttering: “I hope she never runs for leader.” Anna Soubry and Nicky Morgan, the Thelma and Louise of Tory opposition to Mayhem, were observed nodding in agreement.

Select committee elections are like speed dating. “Who are you?” inquired Labour’s Kevan Jones (Granite Central)of a stranger seeking his vote. She explained that she was Victoria Borwick, the Tory MP for Kensington, but that didn’t help. “This is the first time you’ve spoken to me,” Jones continued, “so the answer’s no.” The aloof Borwick lost, by the way.

Ed Miliband is joining Labour’s relaunched Tribune Group of MPs to continue his political convalescence. Next stop: the shadow cabinet?

Kevin Maguire is Associate Editor (Politics) on the Daily Mirror and author of our Commons Confidential column on the high politics and low life in Westminster. An award-winning journalist, he is in frequent demand on television and radio and co-authored a book on great parliamentary scandals. He was formerly Chief Reporter on the Guardian and Labour Correspondent on the Daily Telegraph.

This article first appeared in the 27 October 2016 issue of the New Statesman, American Rage