London, 3 November – In a development that will bring some relief to the Treasury, Brent crude has settled back at levels seen before the latest escalation in the Persian Gulf. The benchmark closed at $72.40 a barrel on Friday, a decline that effectively wipes out the risk premium that built up after Tehran’s latest provocation. For a Chancellor who has been walking a fiscal tightrope, this is welcome news.
Let us be clear: this is not a return to the halcyon days of cheap energy. The structural imbalances that have plagued the oil market since the pandemic persist. But the immediate geopolitical tail-risk has receded, and the market is once again focused on the fundamentals: sluggish global demand, robust supply from non-OPEC producers, and a general sense that the cartel’s ability to control prices is waning.
For the British economy, the implications are twofold. First, the immediate cost-of-living squeeze will ease. Petrol prices at the pumps are already falling, and this filter through to headline inflation figures in the coming months. The Bank of England, which has been agonising over the pace of rate cuts, will now have one less headache. A sustained drop in energy costs could allow the Monetary Policy Committee to trim rates more aggressively, stimulating investment and easing the mortgage burden on households.
Second, the government’s fiscal position benefits. Lower fuel costs reduce the pressure on the Treasury to extend the temporary fuel duty cut, a measure that has cost billions. With oil stabilised, the Chancellor can credibly plan for a return to pre-crisis taxation levels without sparking a political firestorm. The gilts market, which has been notoriously skittish, will take note. A credible path to lower borrowing is the only thing that will keep the 10-year yield from spiking again.
But let us not get carried away. This stability is fragile. The same factors that drove prices down – a slowing Chinese economy, a near-recession in Europe – are not unequivocally good news. They signal weaker demand, which means slower global trade. For an export-dependent nation like Britain, that is a long-term concern that no amount of cheap petrol can solve.
Moreover, the geopolitical risk has not vanished. It has merely been postponed. The regime in Tehran remains a serial disruptor. Should the situation escalate again, we will be back to square one, with the brakes slammed on the recovery. Capital flight, which had been moderating, could resume as investors flee to safe havens. The pound, which has been trading in a tight range, would face renewed pressure.
Nevertheless, for the moment, the market is breathing a sigh of relief. The British economic strategy, which rested on a slow recovery built on lower inflation and gradual rate cuts, now looks more plausible. If the Bank of England can hold its nerve and the Chancellor can deliver a credible fiscal plan in the Autumn Statement, the outlook will improve. But in this game, no one wins for long. The next shock is always around the corner.
