The 72 per cent drop… Oil prices were the subject of the second ever To The Point post, just under a year ago. I figured they should probably be the subject of today’s too. After all, during trading this morning, the price of a barrel of Brent Crude dipped below $30 for the first time since April 2004. The graph above shows how we reached this point. Back in December it was $40 a barrel. Back in June it was $60. Back at the start of 2014 it was $108. In fact, oil prices have fallen by about 72 per cent over the past two years.
…that could go further. The question quivers on observers’ lips: how low can it go? Before Christmas, Goldman Sachs predicted $20 barrels. Now, in this new year of oil surpluses, some City analysts are anticipating $10 barrels. Whatever the bottom is, the chief executive of BP reckons that it will be reached in this first quarter, but that prices will remain pretty low for the next two years. This is one of the major economic stories of now and of the future.
A boon for consumers… This is, at least for the time being, a boon for us consumers because so much of what we consume is derived from oil. The average price of a litre of unleaded has declined from just over £1.30 to around £1.02, or by 22 per cent, over the past two years. The average price of a litre of diesel has declined from £1.38 to £1.03, or by 25 per cent. And those are just the average figures. Some supermarkets are now selling both for under £1 a litre. Our pocketbooks are feeling the benefit.
…but not necessarily for tax revenues. Yet the benefits aren’t being felt all round. Even if we put aside what this means for oil exporting countries and for the global economy, there is still the considerable matter of the public finances. In its most recent Economic and Fiscal Outlook, the Office for Budget Responsibility lowered all of its forecasts for the tax revenue accruing from the UK’s oil and gas industry. As they put it, “Our forecast for UK oil and gas revenues is just £130 million in 2015-16, down from £2.2 billion in 2014-15 and receipts of just under £11 billion four years earlier.”
Will Osborne go hiking? The irony is that, for George Osborne, low oil prices could also provide a way to boost the public finances. During the last Parliament, he tried to help motorists struggling with high prices by either freezing or slightly cutting fuel duty, forgoing £billions in tax revenue in the process. Now that the market is pushing prices down faster than any Chancellor ever could, he might decide to rethink that policy. Consumers could face higher taxes, in the end.