Wednesday, February 08, 2006

Oil Prices and the UK economy

Today BP announces yet more profit and yet more money for shareholders. The statistic quoted of the amount this means for UK pensions funds doesn't only make the point Lord Browne is trying to make about the positive effects of oil income that our Chancellor of the Exchequer is currently attempting to discourage through the tax system by increasing the costs of investment in the North Sea. Browne has also, inadvertently, pointed to the fact that Gordon Brown is more of a problem for the pensions system than his initial tax raid suggested and to the flaw in his excuses for new weaknesses in the UK economy.

In attempting to shift the blame for falling growth to the oil price Brown was making little economic sense. When the oil price rises this is a huge problem for the US which heavily imports oil but this is not the case in the UK. When the oil price rises it has a distributional effect in the UK as it costs motorists money but it also increases the income of our oil companies which, in turn, pay money to organisations like pension funds; on balance the effect is close to zero as we have only just become net importers of oil. Redistributing money from the motorists to pensioners and other investors isn't inherently harmful, pension funds are hard up, and cannot be the explanation for major changes in growth rates. The reason for past oil related shocks was that they crashed genuinely oil dependent economies and this crash hurt us; this cannot be the case now when the US is doing so much better than we are. Labour reductions in labour market flexibility and increases in the size of the state are a better way to explain falls in growth rates but are less convenient for the Chancellor.

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