As oil producers count the cost of the plunging oil price, countries that rely on oil imports are rubbing their hands.
The UK is among many European countries to welcome a collapse in the cost of fossil fuels and the knock-on effects for petrol prices.
At a time when many British workers are struggling to cope with low wage rises and austerity-driven benefit cuts, any savings on the weekly trip to the petrol station help maintain living standards.
In an election year, it could hand the government a vote-winning boost – although that will depend, as George Osborne made clear, on whether the benefits are passed on.
The fall in Brent crude to close to $50 a barrel also provides businesses with an easy way to improve profit margins.
Every business survey in the last couple of months has shown that raw materials’ costs have come down, especially oil. It would be surprising if they had failed to bank some benefit since last June, when Brent crude was trading at above $110.
That cascade of lower costs along the business supply chain is likely to continue for some months. Rising oil prices have traditionally posed problems for the global economy, so falling oil prices should lead to stronger growth. And the slump in Brent crude will almost certainly lead to a worldwide economic boost, in time.
There are, though, a number of reasons to be wary. Is the price drop sustainable? There may be big financial losses especially if the shale industry goes the same way as the sub-prime mortgage boom. There are winners and losers, and the losers – oil-dependent Russia for instance – may react in dangerous and unpredictable ways.
On the first question of how sustainable this sharp drop in oil prices can be, there is a view that prices will stay the same or fall further for several more years. There is plenty of oil being pumped out of the ground, pushing up supply, and this is met by slowing demand as the global economy falters.
Of the major global economies, the US is growing the strongest but some of its fizz has evaporated in the last six months.But the drop in the oil price since June cannot entirely be explained by these factors.
The last time the price halved, the financial crash was in full swing. So it is possible that factors affecting supply and demand will have only a marginal part to play in the next six months. More important will be the expectation of rising interest rates in the US. Oil is priced in dollars, which means buyers need dollars to buy oil.
Many buyers borrow the money to secure ever-larger contracts, which they then trade at a profit for other assets. For the last six years, low interest rates in the US have encouraged this behaviour, with many speculators buying oil for no other reason than as a vehicle to park trillions of dollars of savings.
There are estimated to be $9tn (£6tn) of borrowed dollars holding oil contracts and other risky assets. The prospect of higher interest rates in the US makes that debt more costly to service. To prevent themselves going bust, these speculators must dump their contracts, driving down the price.
The US Federal Reserve has yet to raise interest rates, but is getting close. Cooling the US economy by ending six years of historically low rates may seem a logical move to the Fed. But with huge borrowings in dollars around the world, not just to buy oil, the impact will be widespread.
Will that usher in a new decade of $20-a-barrel oil, as we saw in the 1990s? Or will volatile markets re-adjust once the trajectory of US interest rates is known, driving the price back up again?
The amount of money tied up in oil leads to the second reason to be wary: the potential shockwaves on global financial markets from sharp price moves. We know from the financial crisis that something relatively mundane like problems with US mortgage contracts can have lasting and global repercussions.
Finally, there are the losers from falling oil prices: the oil-exporting nations. Many of these, such as Venezuela, Iran and Russia, have factored a relatively high oil price into their economic policies and budgets.
Russia is already hurting as a combination of falling oil prices and sanctions imposed by the west have seen its economy contract for the first time in five years. There will be more geopolitical uncertainty in 2015, regardless of the benefits elsewhere. assets”.
theguardian.com
The UK is among many European countries to welcome a collapse in the cost of fossil fuels and the knock-on effects for petrol prices.
At a time when many British workers are struggling to cope with low wage rises and austerity-driven benefit cuts, any savings on the weekly trip to the petrol station help maintain living standards.
In an election year, it could hand the government a vote-winning boost – although that will depend, as George Osborne made clear, on whether the benefits are passed on.
The fall in Brent crude to close to $50 a barrel also provides businesses with an easy way to improve profit margins.
Every business survey in the last couple of months has shown that raw materials’ costs have come down, especially oil. It would be surprising if they had failed to bank some benefit since last June, when Brent crude was trading at above $110.
That cascade of lower costs along the business supply chain is likely to continue for some months. Rising oil prices have traditionally posed problems for the global economy, so falling oil prices should lead to stronger growth. And the slump in Brent crude will almost certainly lead to a worldwide economic boost, in time.
There are, though, a number of reasons to be wary. Is the price drop sustainable? There may be big financial losses especially if the shale industry goes the same way as the sub-prime mortgage boom. There are winners and losers, and the losers – oil-dependent Russia for instance – may react in dangerous and unpredictable ways.
On the first question of how sustainable this sharp drop in oil prices can be, there is a view that prices will stay the same or fall further for several more years. There is plenty of oil being pumped out of the ground, pushing up supply, and this is met by slowing demand as the global economy falters.
Of the major global economies, the US is growing the strongest but some of its fizz has evaporated in the last six months.But the drop in the oil price since June cannot entirely be explained by these factors.
The last time the price halved, the financial crash was in full swing. So it is possible that factors affecting supply and demand will have only a marginal part to play in the next six months. More important will be the expectation of rising interest rates in the US. Oil is priced in dollars, which means buyers need dollars to buy oil.
Many buyers borrow the money to secure ever-larger contracts, which they then trade at a profit for other assets. For the last six years, low interest rates in the US have encouraged this behaviour, with many speculators buying oil for no other reason than as a vehicle to park trillions of dollars of savings.
There are estimated to be $9tn (£6tn) of borrowed dollars holding oil contracts and other risky assets. The prospect of higher interest rates in the US makes that debt more costly to service. To prevent themselves going bust, these speculators must dump their contracts, driving down the price.
The US Federal Reserve has yet to raise interest rates, but is getting close. Cooling the US economy by ending six years of historically low rates may seem a logical move to the Fed. But with huge borrowings in dollars around the world, not just to buy oil, the impact will be widespread.
Will that usher in a new decade of $20-a-barrel oil, as we saw in the 1990s? Or will volatile markets re-adjust once the trajectory of US interest rates is known, driving the price back up again?
The amount of money tied up in oil leads to the second reason to be wary: the potential shockwaves on global financial markets from sharp price moves. We know from the financial crisis that something relatively mundane like problems with US mortgage contracts can have lasting and global repercussions.
Finally, there are the losers from falling oil prices: the oil-exporting nations. Many of these, such as Venezuela, Iran and Russia, have factored a relatively high oil price into their economic policies and budgets.
Russia is already hurting as a combination of falling oil prices and sanctions imposed by the west have seen its economy contract for the first time in five years. There will be more geopolitical uncertainty in 2015, regardless of the benefits elsewhere. assets”.
theguardian.com
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