The oil markets have delivered a resounding verdict on the government's energy security strategy. Crude prices have tumbled to levels not seen since before the Iran conflict, a development that will send a shiver through the Treasury and a cheer through the business community. Brent crude dipped below $62 a barrel this morning, down from the peaks of $110 reached during the height of the crisis.
This is a 40% collapse, a move that rewrites the economic script for the year ahead. The trigger? A combination of robust North Sea production and a surprisingly elastic supply response from the Permian Basin.
The market is now pricing in a glut, a scenario that seemed impossible just six months ago when the Strait of Hormuz was a naval chokepoint. The Chancellor will be quietly relieved. Lower oil prices mean lower inflation, a respite for the consumer and a boost for real wages.
But the Bank of England will be watching the 'greenflation' story with a jaundiced eye. The energy transition is not without its costs, and cheap oil could delay the shift to renewables. Remember that the Treasury's carbon tax plans are based on a rising oil price.
That arithmetic now looks suspect. Still, for the here and now, this is a vindication of the government's 'drill, baby, drill' approach. It is a bet that has paid off, for now.
The geopolitical risk premium has evaporated. The question is: can it hold? The market is saying yes, but it has been wrong before.
The bottom line: this oil price collapse is a flexible friend for the consumer, but a threat to the fiscal outlook. The yield on the 30-year gilt has fallen four basis points in sympathy. That is a vote of confidence in the UK's energy security.
But it is also a reminder that the market moves in mysterious ways. The next test will be the budget. The Chancellor must resist the temptation to tax the oil majors to death.
That would be a classic mistake. For now, the market is rewarding the strategy. That is the bottom line.
