Truss’s push for growth is out of her hands
LIAM HALLIGAN Follow Liam on Twitter @liamhalligan
Before Russia invaded Ukraine in late February, oil cost around $90 a barrel. As war erupted, oil prices surged with Brent crude reaching almost $123 a barrel in early March, given that Russia accounts for around a tenth of oil production worldwide.
Having since been on a roller coaster rise, crude was back down around $85 last weekend, less than when the Kremlin sent tanks into Ukraine. Western economists have been hoping that, as the global economy slows, softening oil demand would see prices fall further, helping to tame inflation and the broader cost of living crisis.
All that changed last Wednesday when the 15-nation Opec oil exporters’ cartel and allies including Russia met in Vienna. Their decision to approve deep production cuts sent shockwaves across global energy markets. As of this weekend, oil is trading at around $97 a barrel, up 14pc over the past week and almost 23pc more expensive than this time last year.
Opec controls about two-fifths of global oil production but four-fifths of proven reserves. Its latest decision puts it on a collision course with Western oil importers. It also points to deepening collaboration between Saudi Arabia – the Opec lynch pin – and Russia, a non-member that collaborates as part of the Opec+ grouping. The plan is to reduce oil output by two million barrels a day – about 2pc of global production – in an aggressive attempt by these big producers to ramp crude prices up.
Even before Opec acted, oil was more expensive than at any point between mid-2014 and early 2022. On top of that, the pain of higher prices is being compounded by the fact that oil is priced in dollars, and the US currency is on a surge – making imports more expensive to everyone else. Expect petrol and diesel prices to rise over the coming weeks – not least in the UK, where filling up already costs more than in 2008, even though back then crude hit almost $150 a barrel.
The implications of this latest Opec meeting have yet to become mainstream news, amidst more eye-catching concerns about energy. Last week the National Grid warned that British households could lose power for up to three hours at a time this winter, if gas supplies run extremely low.
National Grid – which keeps the lights on in England, Scotland and Wales – said Russia’s invasion of Ukraine had created “unprecedented turmoil and volatility” across global energy markets. With Western Europe having depended on Russia for about 40pc of gas used before this war, flows have been significantly curtailed, leaving countries scrambling for supplies.
The National Grid’s “base case” is there will be sufficient energy to provide usual electricity levels this winter. But it has modelled two more worrying scenarios – the first of which sees electricity imports cease via interconnectors from France, Belgium and the Netherlands, but with gas still flowing through the 725-mile Langeled undersea pipeline from Norway to the Yorkshire coast.
Having struck deals with three power companies to keep additional coal-fired power generators on standby, National Grid says under this scenario, supply interruptions will be avoided – as long as energy use by households and businesses is managed, with some shifting to different times of the day.
Yet a second, much more serious scenario, sees the energy crisis across Europe escalate, with diminishing supplies across Britain then limiting use of our gas-fired power stations.
Distributors would then be forced to cut off electricity to homes and firms for up to three hours during the day, say the National Grid. That hasn’t happened since the early 1970s when strikes by coal and rail unions crippled the UK’S energy industry. Back then, power cuts affected homes with firms limited to just three consecutive days of electricity use – the infamous “three-day week”.
When campaigning to be Tory leader in August, Liz Truss pledged that there would be no energy rationing this winter. And at last week’s Conservative Party conference in Birmingham, her first as Prime Minister, she put on a brave face. “My priorities are growth, growth and growth”, declared Truss, perhaps channelling Tony Blair’s “education, education, education”, speech in 1996 to the Labour Party conference just before becoming prime minister.
“The opponents of growth, the vested interests, the forces of decline, are wrong, wrong, wrong” she told the party faithful, in a definite throwback to another prime minister’s performance. For it was back in 1990, responding to attempts by Brussels to further dilute UK sovereignty, that Margaret Thatcher insisted, “no, no, no,” from the House of Commons despatch box.
Rather than the Iron Lady, Truss looks politically tin-eared, after she and Chancellor Kwasi Kwarteng attempted to lower the top 45pc rate of “additional” tax to 40pc amid of an escalating cost of living crisis.
They were forced into an about-turn during their own conference, after “Tory tax cuts” were blamed for serious jitters on currency and debt markets, with the pound tumbling and government borrowing costs sharply up – a trend that rippled out across the economy, causing mortgage and pension panic.
The reality is, though, as Truss and her senior team attempt to assert themselves and their “pro-growth, supply-side agenda”, the trajectory of the UK economy – and with it, this Government’s survival – depends on market and broader financial forces that are way beyond any politician’s control.
Market interest rates are rising, and that will continue as we retreat from the ultra-low levels that have prevailed since the 2008 global financial crisis. No politician – or central bank for that matter – can stop that happening
And the stability of the UK’S public finances has nothing to do with whether the top rate of tax is scrapped – a move which on paper costs the Treasury about £2bn, a rounding error amidst government revenues exceeding £850bn.
What really matters, now the state is on the hook to deliver electricity at a certain unit price, is the wholesale price of gas. If that keeps falling – and it’s down 53pc since late August, from €339 (£298) to €156 per megawatt hour – then the energy price cap will cost tens of billions of pounds.
But if gas prices spike, we’re looking at hundreds of billions to prevent countless bankruptcies and unpaid bills across Britain.
Then, the UK’S fiscal stability really would be at risk.
‘The economy’s trajectory depends on market and broader financial forces that are way beyond any politician’s control’