Most of the world runs on oil, and the dramatic fall in the price of crude should provide the global economy with a huge boost.
The International Monetary Fund (IMF) has put a number on it, estimating that each $10 a barrel fall in the price lifts world growth by 0.2%.
Since last June a barrel of Brent crude has more than halved in value, dropping by more than $60 – that’s a shot in the arm for global GDP of 1.2 percentage points, or $800bn (£528bn) more economic activity in the world – as it slumped to below $50 this week, including a renewed tumble to less than $49 on Friday. Oil is still an essential ingredient in most manufactured goods, as well as powering their transfer from factory to shopfloor.
But George Osborne demanded this week that suppliers pass on the benefit to consumers if the economy is to get the lift it desperately needs. The chancellor made clear that petrol retailers are in his sights, along with energy firms and airlines. He knows that petrol is a major cost for Britain’s voters, who may be more forgiving of his austerity measures if their incomes can be made to stretch a bit further.
With petrol prices falling below £1.10 a litre since the New Year, the £1 litre is edging closer. However, given that tax accounts for around two-thirds of the price of a litre, a steep fall in crude will not be matched exactly on forecourts.
Still, a sudden collapse foreseen by few in the oil business or the financial community also creates losers. Producers, exploration companies and oil speculators have all suffered.
One report found that 46 US oil and gas businesses had seen $1.6tn wiped off their values since last summer. Scotland is facing thousands of job losses, from riggers in Aberdeen to oil consultants in Edinburgh. Jim Murphy, leader of the Scottish Labour party, has said he would set up a “resilience fund” to help communities hit by the falling oil price, as Aberdeen city council warned the city faced “serious issues with the falling oil price”.
The Saudi Arabian government, like most producers, must tap its financial reserves for billions of dollars to maintain public spending. The Saudis have the benefit of a $400bn stash to draw on, but Venezuela and Nigeria are among the spendthrift oil producing countries that have squandered their savings and must now consider making spending cuts because their state budgets require an oil price of more than $100 a barrel. Major oil companies are also facing challenges from the oil price, with BP cutting hundreds of jobs and its rivals suffering share price declines in recent months.
It was clear to most analysts that the decline in Brent crude from its 2014 peak was the result of a slowdown in global growth, in part the result of unusually high oil prices. China’s manufacturing engine has shifted down a gear while the eurozone battles to avoid recession and deflation. But as oil prices have tumbled, another factor has appeared as a more plausible explanation.
Much of the money used to buy oil on the international markets is borrowed. This has proved a lucrative trade while interest rates are low. Markets are now betting 2015 is the year US interest rates will go up, which will make those oil trades more expensive. The US central bank is the one to watch because traders buy in dollars and pay interest in dollars. For a while they have been dumping oil contracts and sending the price spiralling downwards.
So while supply has increased in the US and demand has decreased, especially in China, the changing mood of financial speculators is having the biggest impact.
The International Monetary Fund (IMF) has put a number on it, estimating that each $10 a barrel fall in the price lifts world growth by 0.2%.
Since last June a barrel of Brent crude has more than halved in value, dropping by more than $60 – that’s a shot in the arm for global GDP of 1.2 percentage points, or $800bn (£528bn) more economic activity in the world – as it slumped to below $50 this week, including a renewed tumble to less than $49 on Friday. Oil is still an essential ingredient in most manufactured goods, as well as powering their transfer from factory to shopfloor.
But George Osborne demanded this week that suppliers pass on the benefit to consumers if the economy is to get the lift it desperately needs. The chancellor made clear that petrol retailers are in his sights, along with energy firms and airlines. He knows that petrol is a major cost for Britain’s voters, who may be more forgiving of his austerity measures if their incomes can be made to stretch a bit further.
With petrol prices falling below £1.10 a litre since the New Year, the £1 litre is edging closer. However, given that tax accounts for around two-thirds of the price of a litre, a steep fall in crude will not be matched exactly on forecourts.
Still, a sudden collapse foreseen by few in the oil business or the financial community also creates losers. Producers, exploration companies and oil speculators have all suffered.
One report found that 46 US oil and gas businesses had seen $1.6tn wiped off their values since last summer. Scotland is facing thousands of job losses, from riggers in Aberdeen to oil consultants in Edinburgh. Jim Murphy, leader of the Scottish Labour party, has said he would set up a “resilience fund” to help communities hit by the falling oil price, as Aberdeen city council warned the city faced “serious issues with the falling oil price”.
The Saudi Arabian government, like most producers, must tap its financial reserves for billions of dollars to maintain public spending. The Saudis have the benefit of a $400bn stash to draw on, but Venezuela and Nigeria are among the spendthrift oil producing countries that have squandered their savings and must now consider making spending cuts because their state budgets require an oil price of more than $100 a barrel. Major oil companies are also facing challenges from the oil price, with BP cutting hundreds of jobs and its rivals suffering share price declines in recent months.
It was clear to most analysts that the decline in Brent crude from its 2014 peak was the result of a slowdown in global growth, in part the result of unusually high oil prices. China’s manufacturing engine has shifted down a gear while the eurozone battles to avoid recession and deflation. But as oil prices have tumbled, another factor has appeared as a more plausible explanation.
Much of the money used to buy oil on the international markets is borrowed. This has proved a lucrative trade while interest rates are low. Markets are now betting 2015 is the year US interest rates will go up, which will make those oil trades more expensive. The US central bank is the one to watch because traders buy in dollars and pay interest in dollars. For a while they have been dumping oil contracts and sending the price spiralling downwards.
So while supply has increased in the US and demand has decreased, especially in China, the changing mood of financial speculators is having the biggest impact.
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