oil prices slashes and market reaction

Almost nobody predicted such a sudden crash in the oil price, so there’s no point trying to guess when and where the falls stop

Another day, another sharp fall in the oil price. Brent crude traded below $79 a barrel on Thursday, completing a 30% fall from June’s $113 and recording a new four-year low. Some spy a great US/Saudi plot to ramp up the political pressure on Russia and Iran, big oil producers, but there is nothing wrong with the conventional explanation: there are few output disruptions and the global economy is weakening.

Throw in Saudi Arabia’s apparent lack of concern – its oil minister’s latest comments were a masterclass in obfuscation – and all the old certainties about the “price floor” being $90, $80 or $70 seem redundant.

Yes, US shale producers, the new actors in the game, may need at least $80 to justify new projects, but investment doesn’t stop and start overnight. Some new shale operations are being moth-balled, but few of the older ones. As for the Saudis’ apparent need to balance their budget at $90, nobody really knows for how long the country’s rulers would be prepared to run an unbalanced budget.

Almost nobody predicted such a sudden crash in the oil price, so there’s no point trying to guess when and where the falls stop. What can be said is that falling prices are good news for consumers of oil. Pump prices are falling in the UK and the low level of general inflation is the main reason why – by the smallest of margins, and only on one measure – real incomes are rising for the first time in five years.

Bank of England governor Mark Carney said this week that it is “more likely than not” that he will have to write an open letter to the chancellor in the next six months to explain why the rate of inflation is below 1%. It could be sooner than that.

Inflation on the CPI measure was 1.2% in September but Brent stood close to $100 when those readings were taken. Petrol and diesel has only a small direct weighting in the CPI index (3.5%) but the oil price causes impacts elsewhere. Energy prices for consumers are static and, by rights, should be falling soon.

Meanwhile, food prices are still coming down, the supermarkets tell us. And it’s a brave clothing retailer that attempts to push up the price of winter clobber in the current warm autumn (clothing is 7.2% of the CPI basket). Get your biro ready, Mr Carney.