$100 oil offset by falling pound
Good news: oil has fallen below $100 again. Bad news: the pound is down as well, meaning much of the gain on fuel costs will be missed by UK manufacturers.
Over the two years when the oil price trebled to almost $150 the rising pound helped offset the damage and fuel costs rose less in the UK than the US. Now sterling and energy costs are falling together and that means the benefit of cheaper oil will be tempered too.
While the oil price has fallen by nearly a third from $146, the pound has fallen by 12 per cent against the dollar. Most of our trade is with euro-denominated countries but all of our oil is bought in dollars – wherever it comes from.
That means that in sterling terms, a barrel has fallen from £73 at the peak to £56 as it passes through $100 – a sterling fall of just 22 per cent, or only two-thirds of the benefit that US manufacturers are getting.
Is the fall in oil and the slide in sterling related? The dollar rate measures the relative strength of the US and UK economies – so the dollar’s rise suggests America is heading towards recession more slowly than Britain. The oil price reflects the balance between supply and demand, and despite Opec cutting production, global consumption is falling faster.
Currencies are a zero-sum gain model: they cannot all be weak together. Even if both the US and UK economies are in trouble, one currency has to gain if the other declines. Oil, however, can weaken everywhere simultaneously and the price fall reflects the global economic slowdown.
The fall in sterling and the fall in oil are thus doubly bad news for Britain despite the short-term gain: they are saying that the global national product is falling and that, in an already weak world, Britain is faring less well than the dollar economies.
