Why higher energy prices are a good sign
If the bad news is that oil is back over $60 a barrel, that rise is also the good news too. While it puts pressure on costs, the price increase is also telling us the recession is ending.
Oil is still far cheaper than the $150 it reached before the credit crunch turned into recession but it is more expensive than when it last rose above $60. Weaker sterling means that $60 today is 33 per cent more than when the pound bought two dollars.
And if a rise in the global oil price anticipates a recovery in the world economy, the fall in sterling suggests doubts over whether Britain will share in that improvement. Or it would if markets were not being manipulated: neither sterling nor oil are free markets.
While demand for oil reflects free trade, supply is controlled by the Opec producers and their allies. Now the producing nations see demand rising they can afford to police their output quotas more strictly, making up on price rises the revenue they lose from not increasing production. No wonder the Saudis are talking of $75 a barrel and there is nothing the consumer countries can do about it.
But there are also signs that sterling has been allowed to fall to an artificially low level. Cutting official interest rates so steeply not only helps companies by cutting borrowing costs, it helps exporters by pushing down the pound and thus selling prices. By undercutting eurozone rates, the UK has devalued the pound. That raises the price of imports, but with inflation so low because of the recession, it is a price the monetary authorities have been prepared to live with.
Oil is one of those imports, of course. But as recession eases, interest rates can be allowed to rise back to more normal levels, allowing sterling to strengthen and thus offsetting the rise in the price of oil as well as limiting other inflation.
The signs are that sterling has bottomed and that the pound will gently rise from here. That’s another sign that the recession is ending, even if the stronger currency acts as a brake on the recovery.
There are a lot of see-saws in economics – indicators that rise when others fall - but on balance, a stronger oil price is to be welcomed.
