LONDON—Lower oil prices may be the only thing that can save the British economy from a painful slowdown and revive Prime Minister Gordon Brown's fortunes, but like many leaders around the world he is powerless to bring costs down.
A year since taking office, Brown's popularity is in tatters. The economy is on course for its weakest showing in 16 years and the housing market looks primed for a nasty downturn.
The relentless march of crude prices to record highs near $140 a barrel is partly to blame. Not only is it putting a massive dent in Britons' wallets, it's stopping the Bank of England from cutting interest rates to ease the economic pain.
"Rising petrol prices do have an unusually large dampening effect on consumer sentiment," said Philip Shaw, chief economist at banking group Investec.
"The effect of higher oil prices can be seen in the latest CPI data and they are likely to push inflation up further."
G8 Impotence
How to get high oil prices down will top the agenda at next month's meeting of Group of Eight leaders in Japan. Brown probably has more at stake than the others. His Labour party is 20 points behind in the polls as confidence in him has crumbled.
Underlining his resolve, or perhaps desperation, Brown flew to Saudi Arabia last weekend -- the only G8 leader to make the trip -- to ask leading oil producers to pump more. His Saudi hosts said they would but the oil price only climbed further.
"It shows he cares which is about all politicians can do right now. They can't just rustle up oil from thin air," said Stephen Lewis, chief economist at brokerage firm Insinger De Beaufort.
Other G8 countries, led by Italy, are calling for greater curbs on speculators to bring down oil prices. Congress in the United States has also discussed this and the International Monetary Fund is expected to report on it later in the year.
Experts predict household bills could rise by another 15-20 percent in the next few months on top of the double-digit increases of the past two years. Petrol prices were up some 20 percent this year even before the latest spike in the oil price.
Retailers say the loss of consumer spending power is hurting their bottom line as people cut back on non-essentials. Company profits are being eaten up by the huge rise in energy costs. Factory costs rose by a record 27.6 percent on the year in May
Official data shows the British economy is holding up, but more timely surveys suggest it could shrink in the face of soaring commodity prices and a global credit crunch.
The Bank of England's hands appear tied, however. Food and fuel prices pushed inflation up to 3.3 percent last month, the highest level since the Labour government came to power in 1997. It could soon hit 4 percent, double the central bank's target.
That's making it harder, if not impossible, for the central bank to provide growth-boosting interest rate cuts. Markets are betting rates will have to rise to bring inflation down.
With an election pencilled in for April 2010, Brown needs oil prices to come down quickly to boost stretched household budgets and give the central bank room to cut borrowing costs.
"I think the chances of the economy pulling around in time to give Gordon Brown a boost are remote," said Lewis.
What Can He Do?
The problem is that policymakers are effectively powerless to control the price of oil. Brown's trip to Saudi Arabia or the G8 finance ministers meeting in Japan this month shows that.
With the oil price effectively out of his hands, Brown is expected to put forward a new economic plan when parliament comes back from the summer break.
Allies say his message is that after 10 years as finance minister, he is best equipped to take Britain through the current economic storm -- but that message has so far failed to boost his popularity. So he needs a recovery.
Treasury officials are scratching their heads over what else can be done to soothe the pain of rising petrol prices.
"The government understands that businesses and families are feeling the pressure from high fuel prices, and therefore the Budget postponed the two pence increase in fuel duty until October," said a Treasury spokesman.
"The Chancellor has made clear that he will return to this in advance of October".
A one percent cut in petrol duty would cost the government about 260 million pounds ($512 million) a year, but it would need to come down far more to make a substantial difference to the retail price given duty on a litre of petrol is around 50 pence.
Officials are also concerned that cutting tax would not target those on lower incomes, hardest hit by the rise in transport and home heating costs.
More likely, finance minister Alistair Darling may choose to increase the winter fuel tax allowance which helps the elderly and look at ways to make direct payments to poorer families.
"Given the decline in opinion polls for incumbent governments, then there is every incentive for governments to respond through regulatory and perhaps fiscal measures to appease their middle classes," said David Shairp, global strategist at JP Morgan Asset Management. "But this assumes there is fiscal room for manoeuvre."
That's not the case in Britain where the government is already close to breaking its own rule of debt not rising above 40 percent of national output.
Brown had better pray the oil price falls.
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