In my last column before Christmas, I traditionally have liked to bring some good cheer. As you may recall, there have been some years when this has been a herculean task.

But this is not one of them.

I will leave a review of the year just passed to next week’s column. Today, I want to write more about one of the year’s most important developments: low global oil prices. The tale I tell is about the overwhelming power of markets and prices over politics.

Some weeks ago, I stressed that I thought that oil prices would fall further but even I had not imagined that they would fall as far or as fast as they have. Of course, we still do not know whether this is a flash in the pan. It could be. But it doesn’t feel like it.

Three factors have come together to produce this big drop. The first is the slowdown in the world economy, led by China, but reinforced by the sluggishness of the eurozone. The second is increased supply, principally due to the shale fracking revolution in the US. And the third is the collapse of cohesion in Opec.

The third of these seems essentially political in origin and, I suppose, could go into reverse. The key player here is Saudi Arabia.

Supposedly, it wants low oil prices to hurt its traditional rival in the area, Iran, which is more vulnerable financially. Yet there are also sound economic reasons behind the apparent fracturing of Opec’s power.

For the oil-producing group to work, when there is downward pressure on prices Saudi Arabia, the so-called swing producer, has to cut output.

For it to agree to this, it has to be sure that other producers will not step into the breach and supply the oil that Saudi has cut back. It has always been a temptation for others to do this, and to some extent they always have.

This issue has taken a new twist with the resurgence of US production. Saudi wants to hammer US shale producers to deter long-term supply. This represents a return to traditional Saudi oil policy.

The late Saudi oil minister, Sheikh Yamani, was fond of telling audiences that when the Stone Age came to an end it was not through a shortage of stones. The danger was that the Oil Age would come to an end, not through a shortage of oil, but instead through the production of oil substitutes and increased efficiency.

David Fuller's view

Here is a PDF version of Roger Bootle's article.

Subscribers are certainly familiar with the OPEC oil situation up to at least this point.  Yes, it is clearly a boost for the UK and every other oil importing country.  The anti-UK and particularly anti-English leaders of the Scottish Independence Party should be counting their blessings over losing their divisive referendum, although I do not expect to hear that from Alex Salmond or Nicola Sturgeon.   

The Conservatives deserve to win next year’s General Election set for 7^th May.  After all, they have kept the UK out of the Euro.  Moreover, George Osborne has kept the economy viable, despite Gordon Brown’s debt binge madness before the last General Election. 

However, as much as I would like to share Roger Bootle’s optimism, I have seen too many UK General Elections where Tories have more or less rescued the economy from Labour’s prior ravages, but are far from thanked for it.  Instead, too many swing voters decide that they want ‘caring’ Labour back so that they can throw more middleclass taxpayers’ money at the National Health Service.   

So I am distinctly uneasy about next May’s election, unless Scottish Nationalist MPs, who virtually run Scotland without interference from outside, are barred from being the swing party which could put Labour back in power for the rest of the UK.   

Meanwhile, UK citizens who share my thoughts above have four and a half months to enjoy what should be a mostly bullish tailwind for global stock markets, before we know our General Election result.  My personal portfolio will remain weighted in favour of the Asia Pacific region.