Threat of oil price spike to UK
Threat of oil price spike is on a par with eurozone debt crisis, ITEM
warns British consumers face a perfect storm of rising inflation,
soaring unemployment and a slowing economy if the threat of an oil price
spike is realised, a leading group of economists has warned.
The Ernst & Young ITEM Club said that should heightened political
tensions in the Middle East push the price of oil to $150 (£94) a barrel
from its current level above $120, the Government would also be forced
to borrow more and there would be a greater risk of an early interest
rate hike.
The risk of a further spike is being taken very seriously by the Bank
of England, whose governor Sir Mervyn King has already warned publicly
that disruptions to the supply of oil from Iran or Nigeria would likely
push inflation up.
Andrew Goodwin, senior economic advisor to ITEM, said the threat
posed to the UK economy by an oil price spike was now “on a par” with
that posed by the eurozone debt crisis.
“The eurozone is still very much a live issue and I certainly
wouldn't write it off yet but the oil price spike has been the new
threat from the beginning of the year,” he said.
“Were political tensions in the Middle East to escalate, you could
easily see a further oil price spike.”
He said that given so much of it is sentiment driven, even the fear
that the Strait of Hormuz – which carries a third of the world's oil
seaborne cargos – could close would be enough to cause a major spike.
ITEM has calculated that if oil prices rose to $150 a barrel in May
and stayed there until the end of 2013, the price of unleaded petrol at
the pump would rise to £1.60 a litre before the end of this year.
Under this scenario, inflation would average 3.7pc this year – well
above the Bank's 2pc target and above the Office for Budget
Responsibility's 2.8pc forecast. “This would make life very tough for
households, with inflation likely to comfortably outpace wage growth yet
again,” said Goodwin.
The Bank has forecast that inflation should fall below 2pc by the end
of the year, but rising food prices as well as rising oil prices pose a
increasing threat to that forecast. According to the British Retail
Consortium, annual food inflation jumped to 5.4pc in March, from 4.2pc
in February.
Goodwin said that in “normal circumstances” such an oil price spike
would trigger a recession in the UK, but one-off factors this year would
probably see of the threat of a double-dip. He said that any negative
impact on growth of the extra bank holiday for the Diamond Jubilee would
likely be unwound in the third quarter, in which growth should also
receive a boost from the Olympics.
“Without that [in the event of an oil spike] the UK would certainly
be likely to see at least two negative quarters of growth.”
Unemployment would rise above the psychologically crucial 3m mark to
average 3.07m next year, which would “really bring home” to people the
severity of the situation.
The jobless total currently stands at 2.67million.
On monetary policy he said the Bank would probably try to “ride out
the storm” as higher oil prices pushed up inflation, arguing that the
spike was likely to be temporary. As such, it would justify keeping
interest rates at the historic low of 0.5pc.
“If it became entrenched, that's when you start getting into
problems. If there was a wage reaction, the Bank would likely come under
pressure to act, which would have further negative implications for
growth.”
ITEM thinks more quantitative easing is unlikely in any event, but
certainly so under the oil price spike scenario.
The Telegraph
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