Daily Mail

Long march to oil sanity

- Hamish McRae

FOR anyone wanting to go on filling their car for not much more than £1 a litre they should hope that there will be discord in Doha next Sunday. If, on the other hand, you would quite like to get some sort of return on your savings you should hope that at the forthcomin­g meeting of oil producers there will be sweetness and light.

It isn’t just the Opec countries who will gather in the capital of Qatar. It is all the big oil producers in the world, including Iran which is not ramping up production, and crucially Russia, where production is at a 30year high.

The only important producers who will not be there are the US and Canada – we won’t, but such is the decline in North Sea production that the UK is no longer a globally important producer.

The US for its part is actually cutting production already, not to delight Opec but simply because the economics of shale oil production are different from those of convention­al oil.

With convention­al, the stuff keeps coming out without any more investment. With shale, if the price falls you stop drilling, and because peak production happens early in a well’s life, if you stop drilling production starts to slip.

The deal on the table in Doha, if they can agree it, would be to freeze production at the levels they were in January. That would not of itself push the oil price up from its present level of around $40 a barrel to the $60-80 a barrel range that most oil economists calculate is the sustainabl­e long-term level. But it would be a crucial building block.

Without a deal, present prices could persist a long while yet, putting downward pressure on inflation across the developed world.

Once oil prices do start to climb back, inflation will nudge up and the central banks will have lost their excuse to persist with ultraloose money policies.

So will there be a deal? The producers desperatel­y need one. Russia needs the price above about $80 a barrel to hold down the budget deficit and to check the collapse of the rouble. Saudi needs one to help fund its ambitious social welfare programmes. Iran needs one because, although sanctions are lifted and it can export its oil again, it needs a decent price to help fund the government and hence demonstrat­e to its people that the end of sanctions will bring them greater prosperity.

But that does not mean that countries that are at best suspicious of each other and at worse on the brink of conflict can agree on anything. The market thinks on balance that there won’t be a deal, but with a nervous little twitch that, er, they might just pull it off.

The price has been firming in recent weeks. The producers themselves are engaged in the usual pre-meeting dance, with optimists, such as Kuwait, assuring people that not only there will be a deal but the oil price will go to $60 later this year.

Saudi as always is being non- committal, simply saying that if everyone else agrees, they will too.

And Russia? The present leadership is brilliant in acting against its own self-interest and it may goof once again.

You could say the fact that it is pumping more oil than at any time since 1987 means it doesn’t care about cooperatio­n. But oil meetings spring surprises and if this one does, the long march back towards a sensible oil price will begin. And that in turn would clear the way for a march away from deflation and towards sensible interest rates. I think they just might.

Big spenders

THERE are two ways of figuring out what is happening to the economy. One is to look at the data, what the surveys say, what the various forecaster­s think, and so on.

The other is to look at what people are doing with their money: are they spending or are they holding back?

Last month we had the highest car sales in Britain since the twice-a-year number plate change was introduced in 1999, with 518,707 new cars registered. The nice thing about this is that it is a precise number, not some airy-fairy economist’s estimate. Since cars are still the largest consumer item we buy, it is reasonable to assume that we are still spending big.

Tomorrow we get another precise set of figures in the results of Tesco, our biggest retailer. Much of the comment will be about their strategy, what other non-core assets it will sell aside from garden centres, and more generally whether the wounded giant is back in health.

But there is something else to look for. What are its UK sales – are people buying its stuff? If sales are decently up, and rumours are indeed pretty positive, then that will confirm the same message as the car figures. British consumers must still be pretty upbeat.

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