Some things can never be planned but are very beneficial. So it is with the oil price. Oil prices tumbled in the second half of last year and continued their fall into 2015, though there are one or two signs as I write this that $45-$50 (£29-£33) a barrel may represent the floor in this cycle and the price has begun to rise a little.
Even so, this is a far cry from the $110 a barrel level of last summer, let alone the pre-crisis peak of nearly $150. The big oil companies did not see this price fall coming but they seem to be resigned to lower prices persisting for some time. They are already taking a hit on profits as a result, as are most of the smaller players.
Sometimes, though, you could be forgiven for thinking that the fall in oil prices is all bad news. Commercial property markets are suffering in Aberdeen and other oil capitals. The woes of the oil majors are now well known, as are the challenges that lower prices pose for the North Sea. On that, as Mark Carney pointed out recently, using slightly less direct language than I do, the oil price fall confirms what a lucky escape Scotland had when rejecting independence last September.
What you do not hear much of is what a net positive the oil price fall is for the economy in general.
Cheap oil helps the economy in three ways. It provides consumers with a significant boost to disposable income, equivalent to a tax cut of between £10bn and £15bn.
It lowers business costs, particularly for energy-using businesses, but also those using materials that have an energy input, in other words, the vast majority of materials. And, by pushing inflation lower, they reduce the pressure on the Bank of England to raise interest rates. So, according to the Centre for Economics and Business Research, consumer price inflation will go negative for the first time on record in March and April; the UK will experience mild deflation. Markets do not expect the first move in interest rates until the second half of 2016.
The oil-induced drop in inflation is boosting consumer confidence. The GfK measure of UK consumer confidence rose by five points in January. The big shift over the past year has been as a result of households no longer feeling as squeezed as they were. Rising confidence should result in strong consumer spending – official data suggests that retail sales have been rising at their fastest rate for more than a decade – and be good for consumer-facing parts of the commercial property sector.
There are also more direct effects on business. Both manufacturing and construction were under the cosh in the final months of 2014 but have shown welcome signs of revival as we have moved into 2015. The January purchasing managers’ index for manufacturing rose to 53, the 23rd consecutive month of expansion and also the sharpest drop in raw material and fuel costs for 5½ years.
Construction appears to be going one better, its purchasing managers’ index up 1.5 points to 59.1 in January. A sector that has been burdened with rising costs saw its lowest rate of cost inflation for nearly two years.
“The collapse in the oil price has the potential to pump up growth,” says HSBC in its latest assessment of the UK economy. Amid the uncertainties, cheaper oil is very good news.
David Smith is economics editor at The Sunday Times
