The biggest flare up in the Middle East since 1973’s Yom Kippur war has prompted an understandable response in the oil price. At almost $90 (£74) a barrel, the price of Brent crude is off its immediate peak in the latest – and bloodiest – round of Hamas versus Israel. Nevertheless, it’s almost 25 per cent higher than its level in June and heading the wrong way for a global economy that’s already struggling for growth.
Two thoughts occur. First, the predictable one – do we buy or sell oil now? Second, what are the implications for the UK economy, company profits and, by extension, for equity investors?
Start with the second question and refer to Chart 1, which shows the varying extent to which the UK is especially burdened by its thirst for oil. Specifically, the chart shows the real costs that UK users pay for their oil compared with their counterparts in the USA; it takes the price of Brent crude, which is denominated in US dollars, then adjusts that for changes in consumer-price inflation – both the rate for the US and the UK – and for the sterling/dollar exchange rate. So, for a given quantity of crude oil, the chart shows the percentage difference between the real amounts that UK and US users pay.