“The global economy is facing the third great oil shock of recent decades,” said UK prime minister Gordon Brown in The Guardian. His response? After protesting lorry drivers brought London and Cardiff traffic to a standstill on Tuesday, Brown and his chancellor, Alistair Darling, staged meetings with oil industry leaders in Scotland to discuss how North Sea production might be increased.
The trip is an effort to show that Brown is listening – but “do not expect too much too soon”, said James Landale on BBC.co.uk. Since Labour “caved in” over the 10p tax band, at a cost of £2.7bn, and still got thumped in the Crewe and Nantwich by election, ministers see little point in further knee-jerk giveaways – although “many Labour MPs are now convinced that a fuel duty/VED U-turn [over planned raises] is on the cards”.
Of course, Britain isn’t the only place with an oil problem – fuel protests are spreading around the globe. French fisherman recently blocked the Fos-sur-Mer oil depot, before being dispersed by riot police, and many Asian countries have seen public anger over increases in the state-controlled prices of fuels. As a result, politicians everywhere are doing their best to show voters that oil is “their number-one issue”, said Olivier Jakob of oil consultancy Petromatrix in Forbes. In Germany, soaring energy costs have even prompted calls by leaders to ban speculation in oil.
A massive bubble in oil?
But the only thing that will make a real difference is a drop in the oil price – and the consensus is against that, expecting a march on to $200 a barrel. They’re probably wrong, said Larry Elliott in The Guardian: the oil market “is a massive bubble waiting to be popped”. People who think it can only rise should look at wheat – down 40% since being “the centre of its own speculative whirl a couple of months ago”.
Quite, said Martin Hutchinson on Breakingviews; the higher it goes the closer it gets to collapse. American demand is already contracting fast in response to higher prices; on current trends, $200 oil would flip the market into a ten million barrels a day supply glut. “Speculators who tried to hold the price at $200” would need to purchase the global consumption shortfall. At $2bn a day, that would soon overwhelm the hedge-fund community.
Oil is coming down anyway, but if governments want to hurry things along all they need do is squeeze traders’ borrowing costs. “If the Fed had the nerve to lift short-term rates by two to three percentage points to 4%-5%, it could avoid real economic damage while still knocking oil speculators out of the market.”