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18 March 2022

How phasing out Russian oil could deepen the cost-of-living crisis

Boris Johnson has spent a week trying to woo Gulf leaders in an attempt to secure alternative energy supplies.

By Freddie Hayward

Boris Johnson has spent the week wooing Gulf leaders and oil executives as the West tries to turn away from Russian oil and gas following Vladimir Putin’s invasion of Ukraine. On Wednesday the Prime Minister travelled from the UAE to Saudi Arabia following a call with the Amir of Qatar earlier in the week. On Monday (14 March) No 10 said he hosted oil executives to discuss increasing investment in North Sea oil and “boosting supply of domestic gas”.

Johnson did not extract a guarantee from Gulf leaders to increase oil supplies: the UK’s read-out for Johnson’s meeting with the Saudi Crown Prince Mohammed bin Salman says they merely agreed “to collaborate to maintain stability in the energy market”. However, as John Jenkins, the UK’s former ambassador to Saudi Arabia, told me yesterday, the trip could simply be the start of a broader rapprochement with the Saudis following the assassination of the journalist Jamal Khashoggi in 2018. Either way, the government’s decision to ditch Russian oil by the end of the year means the pressure to bolster alternative supplies is rising.

This pressure is heightened by the ongoing global energy crisis. Oil prices remain above $100 a barrel, which will in turn heighten the cost of living. Inflation is predicted to rise higher than previously expected as more expensive oil pushes up the cost of goods (though rising energy prices can reduce inflation in the longer term). Next month, the energy price cap will increase by more than half, while the government will hike national insurance.

The severity of the situation was confirmed by the Bank of England’s decision yesterday to increase interest rates in order to hold down inflation. The Bank cited the energy crisis in its explanation for the rate rise and predicted that inflation could reach 8 per cent in the coming months. The Bank’s job is to achieve 2 per cent inflation in a way that sustains growth and employment. While a rate rise may slow rampant inflation, the Bank’s ability to protect households directly from the rising cost of living is limited.

That role falls to the Chancellor. Rishi Sunak will stand at the despatch box next Wednesday to deliver the spring statement amid rising pressure to help consumers face these mounting costs. And his job would have been much easier if the Prime Minister had more success in the Gulf this week.

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