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In Britain, global oil price drop hands PM Cameron a gift

Cheaper oil has handed Prime Minister David Cameron a political gift four months before a national election by lowering prices for everything from petrol to food, blunting rival Labour's attack over a "cost of living crisis".

But with just over 100 days before election day and his Conservatives still narrowly behind Labour in most opinion polls, Cameron's allies are still uncertain if the feel-good factor will arrive fast enough to get him re-elected.

"This is definitely a political windfall and a good thing because it's a fast tax cut in layman's terms and puts money into people's pockets very fast," one source close to Cameron and his Conservative Party told Reuters.

"But there's uncertainty about whether the votes will feed through as fast as the price cuts are feeding through. The election is not that far off now."

Labour insiders say the opposition party has no plans to change tack, arguing that the recovery has been uneven and voters who feel pinched will still respond to its message.

"The cost of living crisis is not just about whether wages can rise faster than prices for one month. It’s a fundamental question about who the economy works for," a Labour source told Reuters, explaining the party's campaign strategy.

The opposition party says workers have suffered the worst decline in real incomes over the course of a parliamentary term for more than a century, with real wages for full-time workers falling by more than 2,000 pounds ($3,032) since 2010.

The past five years have indeed been tough for many, but Britain now has one of the fastest growth rates of any advanced economy. Unemployment is at a multi-year low, mortgages have never been cheaper, and, perhaps most importantly, sliding oil prices have driven down inflation, so that wages are finally rising faster than prices.


"It takes a huge bite out of Labour leader Ed Miliband's core central economic attack that the recovery has only benefited a small proportion of the population," said Oliver Harvey, a Deutsche Bank strategist in London.

One of Miliband's signature proposals, launched to great fanfare in 2013, is a freeze on household utility rates. But that loses its impact with bills falling anyway. E.ON (EONGn.DE) on Tuesday became the first utility to cut household prices and others are expected to follow.

Whether voters will give Cameron credit for improving circumstances is still unclear though.

"The difficulty they have in getting much out of it is that it is beyond their control largely," said Joe Twyman, of pollster YouGov, pointing out that Cameron is obviously not personally responsible for global oil price falls.

"Yes it's going well for them at the moment but there's nothing to suggest it couldn't switch round."

Nor is the oil price fall all good news: Scotland's North Sea oil industry has been hard hit. But the Conservatives have few votes to lose in Scotland.

Some economists are also starting to fret that low inflation could turn to damaging deflation. The euro zone, Britain's biggest trade partner, is already suffering from falling prices and could face more uncertainty from elections in Greece.

Yet overall few dispute that tumbling oil prices are a net benefit for Britain, boosting growth and consumers' disposable incomes, and that some of that feel-good factor should rub off on Cameron. The only question is how much.

"It could be said that Cameron is lucky to have the right economic situation," said YouGov's Twyman. "He and his party will be rubbing their hands with glee."

Published on:
January 16, 2015
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