Daily Times

The big story in the financial markets in 2018 has been the sharp rise in oil prices, which last week hit $80 a barrel for the first time in four years.

But if oil analysts are right and the cost of crude is set to carry on rising, hitting $100 a barrel over the coming months, the big story of 2019 is going to be how oil came down to earth with a bump.

There are, without question, solid reasons for the oil price rises. The global economy has been performing more strongly than expected, with almost every region doing its bit to push up demand. Donald Trump’s tax cuts in the US and the reluctance of the Bank of Japan and the European Central Bank to tighten policy mean there is no immediate threat of recession.

On the other side of the equation, supply has been kept in check. Part of this – the Opec production curbs – was planned. Other aspects of it – the chaos in Venezuela and Donald Trump’s decision to pull out of the Iran nuclear deal – were not.

As a result, there is no longer an oil glut as there was in the middle of the decade. If Iran is frozen out of the global oil market, other suppliers will eventually take up the slack. But it will take time for Opec members to ratchet up supply – even assuming that they decide to do so. The same applies to shale-oil producers in the US. Prices are going up because traders are speculating that demand for oil will exceed supply – and for now that looks like a reasonable assumption.

But push things forward six or nine months and things look a bit different. Although the global economy seems healthy enough, it has eased back since hitting a peak in the final months of 2017 and early 2018. Europe had a weaker-than-expected first quarter; China is clearly slowing down.

In the US, it is a different story. There, the economy is operating at close to full employment, investment is up and consumers are spending freely. But, in a classic case of the law of unintended consequences, any benefits Americans enjoy from Trump’s tax cuts are soon going to be gobbled up by the higher fuel prices caused by the president’s get-tough approach towards Iran.

The Federal Reserve, America’s central bank, is already thinking about raising interest rates three times before the end of this year, and is even more likely to act if it sees higher petrol and diesel prices pushing up inflation when the labour market is so tight.

To be sure, there are reasons to think oil prices may hit $100 a barrel and carry on rising. With Trump in the White House, anything could happen. The Middle East could erupt into a full-scale conflict between Iran and Israel. The brittle detente between North Korea and the US could break down. In those circumstances, the cost of crude would stay higher for longer.

But in the absence of a new geopolitical shock, oil prices will eventually start falling. In oil-importing countries, more expensive crude will eat in to the discretionary spending power of consumers, leading to weaker demand in 2019. This will happen just as the US public is starting to feel the impact of higher interest rates, and as the effects of the tax cuts are wearing off.

On the supply side, two things will happen. First, US shale production – which is highly profitable with oil at $80 a barrel – will expand. Second, Opec producers will – whatever they say in public – quietly start to exceed their quotas in order to make up for the shortfall caused by sanctions on Iran.

Demand for oil is going to fall while supply is going to rise. Markets do not always behave in the way the economics textbooks predict, but this time, they will.

MPs were right to give Carillion chiefs a roasting

The language of the joint select committee report into the collapse of Carillion was punchy, even bombastic. It told of “recklessness, hubris and greed” at the failed outsourcing firm, lamented a “rotten corporate culture” and named and shamed three directors.

The Confederation of British Industry was not impressed. Deputy director general Josh Hardie complained that the report was irresponsible, giving and gave the impression that British business in general was greedy and reckless. Such “knee-jerk soundbites” – as he described the choicest phrases – risked harming investment in Britain.

Perhaps the criticisms struck a little too close to home. After all, Carillion was taken to task for its aggressive accounting, including booking revenues it had not yet pocketed. That’s not a million miles away from the accounting scandal at Tesco, where corporate responsibility fell for eight years under the eye of one J Hardie. It is also worth noting that Carillion’s auditor, KPMG, and the other big accountants, are all members of the CBI.

The Institute of Directors took the opposite approach. Ministers were “right to criticise the failures” at Carillion, said director of policy Edwin Morgan, as many in the business community had been “appalled” by the affair.

The tone of the Carillion report may be edgy, but it is also refreshing. Its authors dispensed with the niceties, abstractions and caveats common to these documents. After such an ignominious scandal, members of the public want to hear what happened in plain English and, for once, that’s what they got.

If there is a reason not to invest in Britain, it isn’t the language of the Carillion post-mortem, but the inadequacies of the directors, regulators, government and corporate culture that killed it. That needed saying.

Published in Daily Times, May 21^st 2018.