Brexit Takes Brent Back in Time

The sagging pound means soaring U.K. oil costs.

Exactly how far back in time will Brexit take Britain? When it comes to oil, the answer is pretty straightforward: about 18 months.

The Pound Stalling

While Brent crude priced in U.S. dollars is back up to where it was this summer, the price in pounds is back to about where it was in May 2015

Source: Bloomberg

Note: Performance indexed to 100.

Sterling's swift collapse amid fears of a hard Brexit means that, priced in pounds, a barrel of Brent crude is now 67 percent more expensive than it was at the start of the year, versus an increase of just 39 percent in U.S. dollar-terms.

Currency moves can weigh heavily on commodity markets, depending on where the big centers of demand are. For example, as I outlined in this column, the Indian rupee's weakness has made gold very expensive when priced in the local currency of one of the world's biggest jewelry markets. This has made the metal much more dependent on fickle demand from investors -- a big reason why gold has dropped by roughly $100 an ounce in the past month.

The U.K. has now been a net importer of petroleum products for 12 quarters in a row, according to government statistics, after decades of being a net exporter (the last time it swung to net imports was in 1984, during the upheaval of the coal miners' strike).

As in so many other respects, though, Britannia is not quite the force it once was in the global oil market. The country consumes about 1.5 percent of the world's oil supply versus roughly 3 percent thirty-odd years ago, the last time the pound was this weak against the dollar. Brits, moreover, are used to getting hosed at the petrol pump -- they pay almost double what Americans do, according to this nifty new graphic from Bloomberg -- and most of the cost is tax. So U.K. retail fuel prices are less sensitive to oil's underlying swings.

But if you live in Britain, driver or otherwise, you'll still pay a price. As fellow Gadfly Marcus Ashworth wrote here today, the mayhem in FX markets could soon migrate to U.K. government bonds. That's in part because a weaker pound will stoke inflation -- with accelerating oil costs leading the charge. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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