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The Black Economy

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Normally when people talk about the black economy they are talking about the economic activity which is not reported to the authorities and is outside the normal declared income streams, but in this instance I am talking about oil or more importantly the price of oil.

The fall in oil prices over the past six months have been as dramatic as the rises in the oil crisis of the 1970's, when rationing was proposed in 1973, but with North Sea oil by 1979 the UK was a net exporter of oil and oil revenue was helping offset the balance of payments. The 1970's are long gone and the UK being a net importer of oil is also history, so now, we like many countries around the world, are hostages to oil and hence energy prices. Only a few days ago a garage in Birmingham dropped the price of petrol below £1 per litre.

This fall in fuel prices is a delight for the average person who is seeing their cost of a tank of fuel dropping dramatically and more importantly meaning they have more money left to use elsewhere. The drop in forecourt prices is the first impact but more will follow as other factors filtering through the system. Energy prices as a whole should now have downward pressure rather than up, and transport costs generally will come down. The latter will then have an impact on the price of goods delivered to the shops, again giving more downward pressure on prices. In the slightly longer term food prices will be impacted further because a significant amount of arable land was turned to producing bio-fuel crops rather than food because of the high fuel costs but economics may demand a switch back to food production, which in turn will give more downward pressure on food prices.

However, the downward pressure on transport costs is not all good for UK plc because as a country we have seen an increase in UK production of goods. Although the emerging economies might be able to produce goods cheaper the transport costs were bumping that production cost up by the time goods landed in UK. Reducing transport costs will enable more of that lower production cost to reach UK.

With wages growing, albeit slowly, we should see more money coming through the economic system generating more economic activity and hence growth, which is good both for the consumer and the taxman; though in the latter case the cut in revenue from oil and fuel sales could well dent the coffers. This dramatic drop in fuel prices has pushed inflation down and we may even see a period of deflation a word which often puts economists into blind panic.

However, if we do have a period of deflation it will be the result of the huge drop in fuel costs at that time when all other costs continue to rise or at least be static. Therefore the consumer is unlikely to think along the normal idea of deflation,  which leaves people thinking it is better buy tomorrow rather than today. That fuel prices are going down is unlikely to make people delay filling up their car with fuel or if it does it will only be for a matter of days and not really impact on the economy as a whole.

The real worry is for the future, it is only then that we will see the true rate of inflation. Oil has fallen by more than 30% in the space of less than 6 months, but that has been balanced by reducing inflation to zero from a rate of less than 2%. It therefore follows that other things are still going up and in 12 months' time when the drop in oil prices comes out of the equation we could suddenly see a jump in the rate of inflation.

Let us hope that the drop in oil prices reflects itself in more economic activity and hence commercial growth within this country rather than reducing the cost of flights abroad so we all jet off and spend out extra cash there instead.

Jonathan Russell

Partner

ReesRussell

 

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