Rising prices will affect us all, says ITV News Economics Editor Joel Hills
Energy price shocks are painful, history tells us they can tip economies into recession. The spikes in the oil price in the 1970s pushed up fuel bills, sending wages, prices and unemployment spiralling upwards and stock markets into a tailspin. Lord Jim O’Neill, an economist who was a Treasury minister in David Cameron’s government says he’s got a feeling of déjà vu. "Usually, when you get a massive rise in oils prices like this one, and like we had twice in the seventies, they usually foreshadow economic weakness and recessions," he told ITV News. "The only way to avoid that is if we get a big stimulus through lower interest rates - and they can’t go down any more - or a big tax cut or a spending increase.
"Given the state of the fiscal position, I can’t imagine the government thinking along those lines. We have to pray that this is very temporary price hike and prices reverse."
The latest thing to rattle investors was news that the US is "actively discussing" a ban on Russian oil exports which, until now, has been excluded from sanctions. The German chancellor quickly suggested that Europe - which consumes half of all the oil Russia exports - has no such plans. Brent Crude was $69 a barrel a year ago. It rose to $94 when Russia invaded Ukraine and has since surged to $123. The UK wholesale price of natural gas also headed north. It’s trading at £5/therm, a year ago it was 50p/therm. What’s happening is extraordinary, it will affect anyone who fills up a car, shops in a supermarket or uses gas and electricity to heat or light their home - which is everyone. The government is already being urged to abandon plans to increase National Insurance and to cut Fuel Duty. Jim O’Neill believes the risk of a recession in the UK has "risen significantly". "I can’t really see how many normal people are going to able to absorb this sort of scale of price increases to their daily and weekly lives without some huge adjustment to how they can spend. And people will feel a lot poorer unless these prices reverse significantly," he said. Russia is the world's third largest oil producer so, in theory, it is currently making a lot of money. In practice there are some signs it is having to offer big discounts to buyers. Although there are no sanctions on oil, the fear they will be imposed has affected demand.
Listen to our podcast for the latest analysis from our teams
Russia’s economy is been pummeled. Western government’s have frozen assets, western companies are pulling out, Russians are withdrawing money from Russian banks, the value of the Rouble has sunk. The longer the war goes on, the higher the risk that Russia experiences a severe recession and a financial crisis. Vladimir Putin and his inner circle may be insulated but the outlook for ordinary Russians is bleak. Sanctions are hurting. If they are extended to cover Russia’s energy exports Jim O’Neill says they would prove "devastating" but there would be consequences for the countries imposing them. "I imagine the only reason why we would want to go [that] far is to raise the probability that this would bring down Putin. The pain and cost for all of us would to be quite significant, I suspect," he said.