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The unexpected will always keep us on our toes


Back to the future: Libya's war has echoes of the 1973 oil crisis

Back to the future: Libya's war has echoes of the 1973 oil crisis

Jerome Delay

Back to the future: Libya's war has echoes of the 1973 oil crisis

Events put us all in our place. We fuss about each twist of the economy, the nuances of a new statistic, the implications of some policy initiative - and then, bang, something comes along that makes all our judgements seem at best a bit petty and at worst utterly wrong.

And so it is right now. The British budget this week will have three or four interesting elements to it. One will be how much better the fiscal deficit will be this year - perhaps £10bn less than projected. Two will be what the Chancellor does about this, if anything. Three will be any changes to the economic forecast. And finally there will be some politically motivated tweaks.

This matters. It matters to us, obviously, but also, more broadly, it matters that this medium-sized but significant economy gets its house in order. It is better for the world to have a well-functioning Britain than one hobbled by debt and dissent.

But it does not matter nearly as much as the world having a secure supply of reasonably priced oil, or a recovering Japan, or a eurozone that is not fraught with impending sovereign default, or a continuing recovery in the US or half a dozen other huge issues facing us.

You see the point. We can all have reservations about what is happening in the UK. I suppose mine, in a nutshell, is that we are getting the macro-economic policies right but may be getting the detailed application of those policies wrong. But we should see everything here in the context of the wider world economy, which has taken a bit of beating over the past couple of weeks.

If the Japan situation is much clearer than it was a week ago, that of North Africa and the Middle East is less so.

In the case of Japan, the back-of-an envelope calculation last week that this could cost the country 5% of GDP seems now to be the right order of magnitude. Or at least it will be, barring some further catastrophe beyond our reasonable expectations. All past experience of coping with natural disasters suggests that lost output is made up reasonably swiftly. And so it will be here. Infrastructure can be mended - the dead can not. The great economic legacy of the tsunami will be the impact on the nuclear power industry worldwide, and nothing can be done about that.

If we know more or less where we stand with respect to Japan, we know much less about the implications for world energy supplies of the unfolding events in Libya, Bahrain and Yemen. My instinct is that this period will come to be seen in a similar light to the oil shock of 1973-74. Whatever happens to oil supplies in the next few months, the pressure will mount for the rest of the world to cut its risks - just as it did after 1973-74. North Africa and the Middle East together sit on two-thirds of the world's proven oil reserves. It is not sensible to be so reliant on the region.

Other stories that may turn out to have a significance beyond immediate headlines include the patch applied by the eurozone leaders on the sovereign debt crisis. Greece got a lower interest rate on its bail-out but Ireland didn't, apparently because it refused to cut its 12.5% corporate tax rate. On any long view that was wise, for Ireland's relationship with the corporate world is even more important than its relationship with its European creditors. One lot will continue to invest and generate jobs; the other will get paid back and that will be that. The long-term importance of this is that further moves towards a single eurozone tax system will be blocked.

There will be sovereign defaults in Europe, that we know. But there won't be common tax rates.