In June last year Brent crude oil prices were trading at $45 a barrel, and OPEC members were just over six months into an agreement to cap production levels in an attempt to put a floor under prices after experiencing a slump from peaks of $115 a barrel in 2014.
Since then we’ve seen prices surge to peaks above $80 amidst speculation that we could see further gains towards $100 a barrel in the coming months. Not surprisingly this surge in prices has started to affect consumer demand, as well as appearing to have a slowing effect on the global economy.
For some reason this appears to have escaped the attention of central bankers across the globe, though to be fair to the US Federal Reserve they are taking steps to arrest the effects of this inflationary spike by pushing interest rates higher, something they have done seven times since 2015 with no significant negative effect on the US economy.
Sadly the Bank of England appears to be asleep at the wheel with a reluctance to follow suit, despite the effect a weaker pound tends to have on domestic inflation. This week we will once again see an impotent central bank wracked by indecision having last month missed another opportunity to build in a safety buffer for the next slowdown. Since the beginning of the year petrol prices have risen from levels of £1.20 a gallon to be at £1.30 a gallon, and from £1.15 a year ago, yet we are being told that headline inflation is starting to slow down. Tell that to my wallet when I fill up my car Mr Carney!
This will be cold comfort to a lot of consumers who have a lot less disposable income, and businesses whose transport costs have gone up as a result, which means that this week’s OPEC meeting is likely to be more important than normal, in terms of a decision to hike output.
Last week US President Trump broke with convention by saying that OPEC should stop manipulating prices higher and increase production in an effort to help prevent this income squeeze hurting US consumers, where prices of gasoline have pushed well above $3 a gallon in most of the country.
Putting to one side the fact that it is some of President Trump's policies that have helped fuel this rise, in prices, pulling out of the Iran nuclear deal being one, this week we will see OPEC members and Russia sit down a discuss a proposal to increase production levels by 1m barrels a day, thus drawing to a close production caps that have lasted since late 2016.
There is an element of self-preservation in seeking to do this, as while most oil producers prefer higher prices they will also want to avoid a scenario where prices reach a level where demand drops off sharply, thus triggering a global slowdown, as well as accelerating the push for renewables.
For now oil prices appear to have found a short term top at $80 a barrel, which means consumers as well as businesses will be hoping that this week’s OPEC meeting succeeds in keeping a lid on prices, and in so doing calling a halt to a period which has seen a steady rise in fuel costs.
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