Just when we thought inflationary forces were softening, the price of crude oil has shot up sharply today in response to an announcement by Opec that it will try to reduce production. A barrel of Brent crude, which touched $120 last summer before falling back to $75 last month, reached $85 at one point today. Some analysts expect it to hit $100. Given that the benign forecasts for inflation which shaped Jeremy Hunt’s budget were predicated on a falling oil price, has the case for economic recovery now collapsed?
On the positive side, last year’s inflationary surge in Europe was more about gas than oil. The spike in wholesale gas prices last July and August was driven by the desperation of European countries to fill their gas storage facilities – and at a time when the facilities for receiving imports of liquified natural gas (LNG) were very limited. Opec’s constraint is bad news for motorists and airline passengers, but on its own it shouldn’t take inflation to new heights – last year’s hike in energy prices will be falling out of the annual inflation figures in coming months. That said, inflation remains stubbornly high, rising unexpectedly in February. Any delay in the projected downward trend in inflation is not going to help the cost-of-living crisis.
The most miserable outcome of Opec’s decision could be geopolitical. When Russia invaded Ukraine in February 2022 the West hoped that it could bring the Russian economy to its knees through sanctions and boycotts. But it has been a struggle to damage Russia when China and India have declined to join the boycott on Russian energy. On the contrary, while the West has cut its imports of Russian oil and gas, India and China have upped theirs, taking advantage of a discount on Russian prices.