Brown’s fear of high oil prices

UK Prime Minister Gordon Brown has little to be happy about these days and rising oil prices, it seems, are  also weighing hard. The Observer reported on Sunday that Brown asked top ministers at the Treasury and the Department of Business to draw up plans responding to both a high oil price and restrained bank lending.

It also has the UK government considering proposing a new role for the IMF in monitoring oil prices.

Whitehall officials are examining proposals for handing the IMF the task of monitoring oil prices as part of the Washington lender’s new beefed-up role as guardian of the global economy. The plan could form part of Britain’s agenda for the next summit of G20 leaders in Pittsburgh, in the US, this autumn.

The role of ‘monitoring’ oil prices is arguably already carried out by the International Energy Agency, which was founded by OECD countries in response to the 1973 oil crisis. But the report suggests Brown wants a more pro-active stance:

Brown believes that the G20 meeting in London in the spring missed an opportunity to put in place measures to stabilise the oil price, after it fell from a peak of $147 a barrel to less than $35 early this year.

What would these measures include, one wonders?

Either way, it’s not surprising that policy makers are becoming increasingly nervous that high oil prices will ruin their plans to push the economy back into growth with low interest rates. The UK chancellor Alistair Darling had already sounded an alarm on oil a week earlier, saying that high and volatile oil prices have “the potential to be a huge problem as far as the recovery is concerned”.

Hard numbers are difficult to come by, but Merrill Lynch estimates that developed economies could tolerate oil prices of up to $90 per barrel. How high is too high from Brown and Darling’s point of view? Neither story reveals a specific price level the UK government has in mind, but Darling’s emphasis on ‘volatility’ reflects another element of the risk. The resurgence of oil prices this year, so soon after last year’s historic high of $147, could help spur inflationary expectations, which in itself drives inflation.

We’ve yet to see such comments from other governments tackling the financial crisis with low interest rates, among them the United States. But you can bet it’s on their mind.

Related links:

Brown’s emergency plan for oil (Observer, 21/06/09)
Short View: Oil and inflation
(FT, 10/06/09)
Rising crude and inflationary expectations
(FT Energy Source, 16/06/09)
What Monty Python can tell us about commodities
(FT Energy Source, 15/06/09)

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