Oil and currency – Britain’s nightmare scenario that may happen soon

I wrote yesterday about the very high oil prices and explained the various views of where the oil and natural gas prices will be in the future. You will remember that they have doubled in twelve months and I expect that they will double again over the next 12 to 24 months.

The United Kingdom’s energy policy over the past 10 years has been derisory and has not taken account of what I and others have been pointing out for years; fuel prices will increase owing to shortages of fuel and increasing demand. It is, I think, as simple as that.

If you look at the 2003 Energy White Paper and at the 2007 Energy White Paper you will, in the light of today’s oil prices, be astonished at just how superficially each white paper deals with the security of our fuel supplies. One relies on markets to provide what we want and the other talks about getting our fair share of the world’s energy – an infantile desire which we do not have the means or the stomach to enforce.

Our government is threatening to embark on a course of a rather hopeless round of trying to persuade OPEC to increase production. Gordon Brown hopes that oil companies will discover more oil. This of course makes a mockery of any climate change policy. Mr Brown will find it hard to reduce the tax take from oil (which is the simplest way of adjusting the price) because his government’s expenditure seems over committed.

So, imagine the doubling of oil prices in the next 24 months without tax relief. The people who will be hit hardest are those who live in rural areas where they need to use cars more and where they are likely to be off the gas grid network and using heating oil. Paying over £1.10 a litre for heating oil will cause real hardship.

But none of these are in themselves a nightmare scenario. That happens if the United States dollar strengthens against the pound sterling. At roughly $2 for every £1 the dollar is at its historical weakest.

Every time there has been a new American President the United States has had increased confidence and that increased confidence works through to more prosperous economy and that in turn creates a stronger dollar.

Of course, the dollar may not strengthen and the oil price may not keep getting harder but these are the conditions that create a nightmare for the United Kingdom: if the dollar strengthened to $1.50 to a pound and the oil price increased to $270 a barrel then instead of paying £67.50 a barrel we would pay £180 a barrel for oil (and £3 a litre for heating oil) and we seem to have done nothing as a nation to insure against this nightmare actually happening.

If you don’t worry too much because you are on natural gas – start worrying because natural gas too is priced in dollars and linked to the oil price.

The energy nightmare could start next year.