The market has spoken again and it is not pretty for OPEC. Benchmarks have crashed back to levels not seen before the Iranian crisis drove them to their summer peaks. Brent crude has shed over 15% in a month, settling at 72 dollars a barrel, a price that makes the Shale patch in America and the new finds in Guyana barely viable.
For Threadneedle Street and the Treasury, this rupture is a welcome coolant. The UK economy, still nursing a nasty case of double-digit inflation, got a jolt of relief this morning as North Sea production held steady at 1.2 million barrels a day. That output, combined with the fall in import costs, effectively gives the Chancellor a tax windfall worth billions in lower fuel duty payments and reduced energy subsidy bills.
But let's not break open the bubbly just yet. The collapse in oil reflects a broader global slowdown that will hit British exports and business investment. If the world is demanding less crude, it is signalling it is demanding fewer British goods and services. The FTSE 250, weighted to domestic cyclicals, slid 0.8% while the supermajors took a pounding.
What does this mean for the man in the street? Petrol prices will dip below £1.40 a litre soon, but the mortgage pain continues. The 10-year gilt yield, stubbornly high at 4.3%, means the housing market remains in cold storage. The Bank of England, however, now has more cover to hold rates at current levels without tipping the economy into a full-blown recession.
Capital flight is the real worry. If oil crashes because of a global bust, investors flee to the dollar and the yen. Sterling has already shed two cents against the greenback this week. A weaker pound helps exporters but punishes consumers through imported food and electronics.
Fiscal hawks should note that the government's borrowing costs are tied to long-term gilts, not oil prices. The era of cheap energy is over, but a temporary reprieve gives the Chancellor room to postpone unpopular decisions. Do not assume the fiscal rule is relaxed. Markets would punish that instantly.
The bottom line is this: lower oil is a tax cut for a beleaguered economy, but it is also a weather vane pointing to stormy economic clouds ahead. The only question is how long the calm lasts before the next squall hits.
