Thursday, July 24, 2008

Oil Prices and Retail Consumption

There has been some interesting news published, which seems to further reinforce my predictions for the future of the state of the UK economy. A while back, there were some positive figures for retail sales and these were questioned by myself (and others) as to their accuracy. On the one hand all of the reports from retailers were negative, but government statistics showed growth. My response was that this was likely to be a statistical error, and my suggestion was to 'wait and see'. Whilst conceding that there was a possibility that the government figures might be right, they simply did not make sense.

The Times has just published an article in which the government figures show the most dramatic decline in retail sales in 20 years, with a 3.9% decline. The article deals with the disputed May figures, but in a fairly inconclusive way. As such, it is still not clear whether May was a statistical anomaly or a last 'huzzah' of consumers. My view remains that is was the former.

I also recently predicted that oil prices would fall in an article written at the start of July:
'Having said that demand for commodities will fall, as the world economy slows, a counter-effect will be the ongoing readjustment of the U.S, economy, with continued pressure on the dollar for some time. Whether the increase in supply will outstrip any further weakening of the dollar becomes the question. My own view is that the increase in supply will see oil falling back in price in about six month’s time. My best guess, and it is no more than that, is that in two year’s time, oil will be back to about $US60-70 a barrel. This is based upon the provision of a small increase in capacity, a drop in demand, set against a further weakening of the dollar. Lots of ‘ifs’ - which is why it is a best guess.'
At the time that I wrote this, there were widespread predictions of ongoing rises, including talk of $200 per barrel. Such increases just did not make any sense, and I was very puzzled at the time that 'experts' could have believed this.

My only surprise is the speed with which oil prices have started to fall. I thought it would take a while for the level of demand to fall back enough to pull prices down. The speed of the fall suggests that the contraction in the world economy is far more dramatic than I had considered to be likely.

So what will the effects of a declining oil price be? There is no denying that it is a positive factor, as it will eventually feed through to consumers. In broader terms, will it effect the slide of the UK economy into depression? The simple answer is 'no', as oil prices were never a major factor in the slide in the UK economy. It was just an additional factor that pushed the slide downwards faster. On a more positive side, it may finally hasten the Bank of England to lower interest rates, which is desperately needed in a period of economic contraction. We can just hope that the bank responds sooner rather than later.

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