The Daily Telegraph - Saturday
Oil breaks $80 a barrel as the Treasury issues ‘chaos’ warning
OIL prices hit $80 a barrel on Friday as Downing Street braces for a fresh wave of higher prices that threaten Britain’s economy.
Brent crude prices spiked by as much as 4pc to $80.75 a barrel on Friday after Iranian-backed Houthi rebels vowed to continue attacking ships in the Red Sea.
It came just hours after the UK and US launched air strikes against more than 60 Houthi targets in Yemen and as official figures showed the economy remained on the brink of recession.
The Treasury has modelled potential scenarios looking at the economic impact of escalating tensions. This includes oil prices rising by more than $10 a barrel and natural gas prices surging by a quarter, the BBC reported.
The UK economy grew by 0.3pc month-on-month in November, according to the Office for National Statistics (ONS). This is slightly stronger than the 0.2pc predicted by economists, and reverses a decline seen in October.
However, experts warned that the UK was still at risk of recession with data for December yet to be published.
The economy shrank by 0.1pc in the three months to September, with two consecutive quarters of contraction considered the definition of a recession.
Yael Selfin, chief economist at KPMG, said: “The economic outlook currently remains gloomy, with a technical recession still potentially on the cards in the second half of 2023, especially given the expected impact from the industrial action in December.”
Elizabeth Martins, chief UK economist at HSBC, added: “If GDP falls back at all in December, the UK will have ended 2023 in recession.”
The Bank of England currently assumes that every 10pc rise in oil prices adds roughly 0.1 percentage points directly to inflation over the following 12-18 months through higher fuel prices alone.
The International Monetary Fund (IMF) believes the global impact is much larger, with higher energy costs also weighing on growth.
Bjarne Schieldrop, chief commodity analyst at SEB, said a $10 jump in the oil price was feasible. He said: “One risk is that Houthi weapon supplies have survived
Spike in Brent crude prices yesterday in the aftermath of Houthi rebels vowing retaliation for US/British attacks
this morning’s strikes, in secure locations, making it near impossible for the US/UK to prevent attacks. Should this be the case, then the Houthis will still be able to rain missiles over ships in the Red Sea and the Bab-el-Mandeb Strait. The potential knock-on from this could be that ships for all practical and safety purposes will have to move around Africa, tying 40-80 million barrels of oil in transit.”
Others highlighted that many Chinese and Russian-operated vessels had continued to sail through the Red Sea since the attacks started in mid-December.
Michelle Bockmann, principal analyst at Lloyd’s List Intelligence, said: “We have not seen those tankers divert.” There has also been little impact on container ships travelling to Russia, Ms Bockmann said.
Simon Johnson, professor at MIT’s Sloan School of Management and former chief economist at the International Monetary Fund (IMF), said if Russian ships are continuing as normal, it suggests the Houthis could have more sophisticated intelligence than expected and are specifically targeting Western ships.
Car giants have also been forced to halt production as a result of the disruption. Tesla in Germany said it was suspending some of its operations for almost two weeks, from January 29 to February 11, amid a lack of vehicle parts.
Analysts at Citi said the shutdown could affect 2.5pc of all German car production in February, which could prolong a downturn in Europe’s biggest economy.
Chinese-owned Volvo has also suspended production at its factory in Belgium for three days as it said supply disruptions had left it with a shortage of gear boxes.
The Prime Minister is still aiming to meet one of his five key pledges to grow the economy as he tries to get on the front foot ahead of a general election expected in the second half of this year.
Grant Fitzner, chief economist at the ONS, said retailers, car leasers and computer games sellers were the main drivers of growth in November.
“We have had quite a bit of quite a number of companies telling us that they saw strong Black Friday sales, which had a positive impact not just on the retail sector, but also warehousing couriers,” he told the BBC.