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From The Times

May 12, 2008

King Oil will turf out Gordon Brown

Market rules: it doesn't matter who is leader, the Government is finished at $200 a barrel

William Rees-Mogg

All serious political analysis has a Marxist element. The core discovery of Karl Marx as a political philosopher was the dominance of economic change in shaping the history of political society. In the last fortnight, exciting events have been happening in Britain, including the Conservative victories in London and the local elections. Yet much more important events have been occurring in the global economy.

It is interesting that Boris Johnson has been elected Mayor of London; that is coup de théâtre for his party that will turn votes as well as heads in other political contests. But, with all respect to Boris Johnson, the peak price for West Texas Intermediate Crude Oil, which closed on Friday in London at $125.81 a barrel, is a far more important event. Boris may preside in London, but the price of oil rules the world.

The oil price has doubled in the last year; some oil traders are already betting that it will eventually reach $200 a barrel. As oil is involved in almost every economic activity, the price rise that has occurred already is the greatest shock to hit the world economy for 30 years. Obviously this changes the economic relationship of the oil-producing countries with the oil-consuming nations.

It makes the Middle Eastern oil producers as well as countries such as Russia, Nigeria and Venezuela much richer. It makes the net oil importers, particularly in the Third World, much poorer. In the 1990s, when oil was much cheaper, Russia and the Middle East were much less powerful. President Putin was able to assert himself in a rising oil market; that has changed Russian foreign policy and the balance of power in the world.

Perhaps the most damaging consequence will be the rise in the price of food. In the 20th century, global agriculture became dependent on oil, not only for transport or cultivation but also for fertilisers and the treatment of crops. Food production is a global industry based on petrochemicals.

In the 21st century this interdependence was extended, as oil prices rose, into the conversion of grain into oil. If oil prices have risen by 100 per cent in the last year, corn prices have also risen by 75 per cent. Most dealers are forecasting that corn and soya will rise further in 2008. Corn is used to make corn-based ethanol as an alternative fuel.

Corn is, of course, also used as stock-feed; if the corn price rises, the price of meat and dairy products must also rise, and those products will become more scarce. Corn stocks in the United States are low. One American analyst has said that “the situation is dangerously tight”.

The market logic runs from higher oil prices to higher grain prices, but also to lower consumer spending on commodities other than oil and grain. Competition for food will cause malnutrition in the poorest countries and threatens famine in failed states such as North Korea, Burma, Sudan and Zimbabwe. It has already led to poor countries regulating grain exports.

How does this process fit the pattern of British politics? There will be direct impacts from higher oil prices. Although North Sea oil has passed its peak production, the North Sea has become even more attractive. North Sea oil will be worth more, and higher prices may encourage the exploitation of marginal wells. The oil prices will make the Scottish National Party even more self-confident, and are a negative for the maintenance of the Union and for Gordon Brown himself.

British consumers are already paying higher prices for gas and petrol and for food in the supermarket. This is unpopular. It already accounts for part of the rising unpopularity of the Government. We do not need to explain Gordon Brown's unpopularity in terms of his gloomy face, or of his being “a son of the Manse”, when every householder is paying more at the supermarket checkout and every motorist is paying more at the petrol station.

Those of us who experienced the oil price shocks of the 1970s know that oil price inflation means that all prices rise and that interest rates rise as well. The natural consequence is that employment falls and trade unions become more militant. In the 1970s the term “stagflation” was coined to describe this combination of inflation and economic stagnation.

This process of impoverishment has begun again. For the ordinary family the prices of everything linked to oil have risen, and are likely to rise further. The easy credit of earlier years is no longer available; house prices are beginning to fall, and they too can be expected to fall further.

In the 1970s almost every democratic government at the start of the decade had been turned out by the end. That is natural enough. The higher oil price caused an inflation of voters' costs and a deflation of voters' assets. We shall pay more for petrol and bread, but our houses will be worth less. The average person is likely to express his protest in his vote.

The Labour Government enjoyed the golden scenario of its first decade when low Chinese prices meant that inflation was controlled while houses rose in value. With competitive costs and rising assets, most people had a rising net worth.

The big economic news is that this benign process has gone into reverse. The price of oil will go on rising; voters will feel poorer; governments will be turned out.

If oil does go to $200 a barrel, it will not matter who is leading the Labour Party - the Labour Government will be kaput. On this Marx was correct. Politics is based on economics. But he could not have known that the future of economics would be based on oil.

Anyone for solar power?

Henry Percy, London, UK

It is not oil prices & Brown they are talking about (in the same breath), in the pubs of Somerset, It is Browns sheer, mind numbing, financial & political incompetence. Especially over the 10 tax rate. Lord Rees Mogg needs to mix more with his fellow man. People feel taxed to the hilt,

David Raynes, Radstock, Somerset

Yawn. I remember as a tiny child visiting Glasgow and seeing a poster referring to Scotland's oil. Now it's past peak production and they're supposed to be declaring independence because of their oil wealth. Something doesn't make sense here.

neil, portadown, n ireland

I cannot but think that coal will be a large part of the increase in oil prices. If viable solutions are found for envirnmental concerns resulting from mining and burning coal. We in the UK and America would have enough coal for centuries.

Larry Baker, Lewistown, United States

Unfortunately the Labour Government will find it very difficult to cut any taxes (including fuel taxes) as its spending commitments give it very little room for manoeuvre. They've had ten years, and ample opportunity, to build up the state's finances to weather this, and wasted them.

Martin, Newmarket, Suffolk

If the govt was a company they would be accused of profiteering and holding customers to ransom.

What benefit are we the tax payer seeing from the millions of extra revenue taken due to the rise in fules impact of fuel duty and VAT?

Russ, Aberdeen,

Commodity prices are rising because the hundreds of billions printed to bail out the banks is being invested by them in commodities to shore up their balance sheets. General inflation, always and everywhere is caused by an increase in the supply of money.What happens when the commodity boom crashes?

Philbo, London, England

"But politics is also based on perception and the Labour Government has the opportunity of adjusting fuel tax to compensate.
sk, East Sussex, England"

Yes but cutting taxes is a policy totally alien to the Labour Party whose main principle is continued rising taxes ad infinitum.

Michael J Cawood, Wrexham, Wales, UK

sk, East Sussex - sorry, the Government does not have the option of adjusting fuel tax to compensate. The Government is effectively broke, because Gordon Brown as Chancellor spent all the money whilst the sun was shining. It is very droll - "ye shall reap as ye sow" has never been more apt!

Richard, Worcester, England

The future is electricity, not oil, we need to get away from oil as medium and move to electiicty as medium, it does not matter what generates it.

Thou i must admit if we had any sense we would close the north sea down and save it for plastics in the future, we have to use it smater, not faster

Mr W Jones, Liverpool, England

"opportunity of adjusting fuel tax to compensate."
And raising what tax to compensate?

Dominic, Manchester, England

Forget global warming. The party that starts building coal power stations, demonstrating that our own selfish interests come 1st. will win. Stop the hand wringing, 'I feel your pain' hypocritical, pompous world statesman pose. It may impress the literati, it doesn't the voters who struggle to cope

bert, coventry,

"some oil traders are already betting that it will eventually reach $200 a barrel"

Sounds like a great time to sell. I remember when oil was $10/barrel and traders were projecting it would go to $5. High oil prices are often self-limiting.

PJ, London,

What is really odd ( and perhaps fatal for the oil using economies) is why, years ago, serious development of non oil power sources did not occur. Not for green reasons ( oh dear) but for plain strategic reasons - dependence on the Middle East should have led not to invasion but to disengagement

david kay, hemingford, uk

The Long Emergency has begun. Consumerism is dead, and with it all present economic and political models. Oil is the basis of all modern political and social structures. Only one party, The BNP, foresaw this and has planned for it. We are the answer.

Lee Barnes, medway, england

Yes, blame the companies who have to compete against state own mega-companies all over the world and litigation by leftest at home. Blame OPEC! Also if we went to war for oil, why isnt our petrol cheaper? Did the anti-war people lie to us?
We the "People" are being lied to by both sides.

William, Atlanta, USA

So now might be a good time for the Government to invest in nuclear technology.

How long before we see small, domestic reactors: one for every home? Impossible? Well thirty years ago the computer on which I am typing was impossible. Where there's a will there's a way.

Adrian Gilbert, Tonbridge,

Is this what the Iraq war was all about?

Securing ourselves petrol to free ourselves from Saudi and/or Russian bondage?

At the price of 500,000 innocent souls?

I have to say that 'going green' might have been a better idea.

And being honest to the voters saying: 'We're bust otherwise!'

Rhys Jaggar, Leeds, UK

An excellent piece ,although I am surprised that Rees Mogg makes no reference to the fact of oil per se being a key factor in the breakup of Britain.It is certainly a key driving element in the ever increasing pressuer for a Scottish referendum on independence. 'It's Scotland's oil' indeed.

Alan Clayton, Inveraray, Scotland

Well, I for one don't want to freeze to death while sitting on top of several hundred years' reserve of coal. Sorry for the environment and all that, but coal may have to return. Petrochemicals and pharmaceuticals should have first call on limited oil supplies. Electric cars yes, freezing house, no.

Adrian Leahy, Bolton,

If Mystic Mogg is predicting imminent apocalypse, surely we should be slightly reassured?!!

Mike Giggler, Colchester, UK

Surely we are still fairly self sufficient in North Sea oil, and our oil import bills are low compared to other industrialised countries.
Also we do have a stake in Iraqi oil, whatever format it might be.
Therefore I dismiss the logic of Rees Mogg's article.

LMC, Salisbury, UK

We should not be blaming OPEC for Bush's Policies. If Obama is elected and the US withdraw's from iraq watch the price of Oil drop! This is a time of great Arab contribution to the world economy and we are blaming them for the falling dollar and US overspending!

sohiab rehman, hemel hempstead, herts

This Government will lower fuel duty, it's the only way it can reverse the eflux of voter support. Once they've hoodwinked the public, raises will follow and then claim a raise is required as another GREEN TAX!!

Jason, Ipswich, England

Dont belive it when they say that Ethanol is driving up food prices. It's the OPEC oil used for fertilizer and transport that's doing it. Stop OPEC oil dependence, stop stravation, enrich African and S American farmers and stop the financial jihad -- make and buy more free-trade Ethanol.

David, London, UK

American petrol prices have risen from $1.50 to over $3, and their consumption has fallen 2% in the last year. Businesses and consumers are already making purchasing decisions on higher oil prices, including renewable energy. The US free enterprise system soon could offer fuel efficient alternatives

Hugo van Randwyck, London, UK

OH DEAR! I think I'm going to panic.

Ken, Bedford, UK

The United Kingdom and all democratic countries must now go on a " War " footing to quickly reduce oil imports to a bare minimum . Very strong Government practical incentives and participation in all oil reduction and replacement projects and also urgent injection of funds for research are needed .

Jasper , guildford, england

Yes oil is the issue, but the cause and effect is the greed and power of oil lobby. When the World's most powerful country is mortgaged to the oil companies what hope do we have. Goverments are terrified of upsetting the status quo, hence no replacement technology and no obvious solutions!

Dean Abbott, Manea, UK

Putting large taxes on petrol begun when oil costs were low and the effect of these taxes was not very noticable. Now that oil is getting much more expensive, this very large taxation is no longer sustainable for the large numbers who live without any effective public transport and the overall tax.

m wood, somerset, uk

"The core discovery of Karl Marx as a political philosopher was the dominance of economic change in shaping the history of political society" It wasn't Marxust discovery. The Greeks, Romans, Chinese, Brits, Americans, everyone knew it long before Marx.

R Mason, London, UK

Ironically, Labour did this to themselves. Had they started a new generation of nuclear power stations a decade ago, the UK would still be an oil exporting nation. Instead, they allowed themselves to be bullied by the "green" lobby. Poetic justice on a cowardly, short-sighted party, I say.

jon livesey, Sunnyvale, CA/USA

On this argument $200 oil will destroy not only this administration, but any subsequent one. If any future government can ride this hurdle, so can this one. First target is to educate the population to grasp the realities, then show that coping measures affect all sectors fairly.

mallory wober, london, england

Reducing fuel taxes to compensate for higher fuel bills will not happen. If it did, taxes would have to increase elsewhere in order to "balance" the budget.

There's no escape from the reckoning that's coming:

This is the tempest long foretold;
Slow to make head but sure to hold.

TJP, Lincolnshire, UK

The gas price is dependent upon price of oil. With 75% of UK homes using it for winter heating and no alternative, its impact on household budgets is similar to that of oil.
Nuclear electricity will help, but cannot replace the enormous heating load provided by natural gas

Paul , northwich, england

The future of economics is the horse and cart, oil was a blip.

kevin, Lincoln, UK

But politics is also based on perception and the Labour Government has the opportunity of adjusting fuel tax to compensate.

sk, East Sussex, England

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William Rees-Mogg

William Rees-Mogg has had a distinguished career with The Times and The Sunday Times. He was Deputy Editor of The Sunday Times before becoming Editor of The Times in 1967, a position he held until 1981. He was made a life peer in 1988. Since 1992 he has been a columnist for The Times, writing on a variety of issues. He has also been chairman of the Broadcast Standards Council and British Arts Council