How falling oil price to affect economies
An IBT Desk Report
Global oil prices have fallen sharply over the past seven months, leading to significant revenue shortfalls in many energy exporting nations, while consumers in many importing countries are likely to have to pay less to heat their homes or drive their cars, the BBC said.
From 2010 until mid-2014, world oil prices had been fairly stable, at around $110 a barrel. But since June, prices have more than halved. Brent crude oil has now dipped below $50 a barrel for the first time since May 2009 and US crude is down to below $48 a barrel.
As Brent crude oil prices fell below $50 a barrel at one stage, for the first time since May 2009, global business growth slowed to its weakest in a year, and analysts forecast price volatility including price war between oil producers.
The rates of expansion slowed in both the manufacturing and service industries, according to JPMorgan’s Global All-Industry Output Index, produced with Markit.
The United States increased domestic oil production by around 48% between 2008-13. As the supply has peaked, the demand for oil has slowed down. Declining consumption of oil in Eurozone and Japan in recent times also complicated the situation. Demand even in the US fell. It is China which played a major role in the oil price fall, thanks to a slowdown in the Chinese economy. And the Opec’s announcement in November that it would not cut production in response to falling prices caused a further drop in oil price.
Although the US government earlier expected that Brent crude would average $68 a barrel in 2015, some traders forecast the price to be falling to $40 or even $30.
However, falling oil prices could be ‘a shot in the arm’ for the global economy, according to the International Monetary Fund. The fund estimates the recent drop in oil prices could add up to 0.7% to global economic output in 2015.
This falling price has also coincided with rising dollar prices that may affect many economies like China and Brazil. Russia has been at the receiving end of the fall of its currency against dollars and impacts of the price fall of oil, which is the main source of revenue.
Saudi Arabia and the Untied Arab Emirates are also losers in the price fall.
According to the Oxford Economics study, the US, a net oil importer, would accelerate economic growth to 3.8 percent in the next two years with oil at $40 a barrel, compared with 3 percent at $84.
Saudi Arabia, the world’s largest oil exporter and Opec’s most influential member, could support global oil prices by cutting back its own production, but there is little sign it wants to do this. Although Saudi Arabia needs oil prices to be around $85 in the longer term, it has deep pockets with a reserve fund of some $700bn – so can withstand lower prices for some time.
The biggest winner would be the Philippines, whose economic growth would accelerate to 7.6 percent on average over the next two years if oil fell to $40,
While cheaper oil helps consumers, business spending is said to have a bigger effect on equities, and oil companies are set to cut investments. Oil at $50 a barrel could trim $6 a share off earnings in the S&P 500 Index this year, according to Savita Subramanian and Dan Suzuki, New York-based strategists at Bank of America Corp.
One concern of central bankers is the effect of falling oil prices on inflation. If crude remains below $60 per barrel this quarter, global inflation will reach levels not seen since the worldwide recession ended in 2009, according to JP Morgan Securities LLC economists led by Bruce Kasman in New York.
