A Slippery Situation: Plummeting Oil Price Divides Economies

Whilst the economic advantages of cheaper oil seem clear at the bowser, there’s plenty more to this story than meets the eye.

It seemed Christmas had come a little early last year when the price of fuel in Australia began to nose dive in November. Indeed, fuelling up has become substantially cheaper; at the time of print some metropolitan petrol stations were selling regular unleaded petrol for less than $1 per litre.

This plummeting price coincides with global oil prices, which have more than halved in value over the past ten months. Between 2010 and mid-2014, world oil prices consistently sat around $110 a barrel, however in recent times Brent crude and U.S. oil have fallen below $50 a barrel.

In Australia, this situation brings obvious short-term benefits. In fact, according to CommSec chief economist Craig James, Australian consumers have already benefited to the tune of $2 to $3 billion. The savings Australians are making at the bowser encourages spending in other areas, and this added confidence will be felt by all retailers, including Dealers.

However, alas, global oil pricing is incredibly complex and sensitive – one economy’s fortune is another’s failure and already the world is seeing the impact devalued oil is having on major economies. To understand this more, a closer look at the situation is required.

Oversupply and Competition

Why is oil so cheap anyway? – The answer boils down to two major factors; oversupply and increased competition.
In the U.S. oil production levels are at their highest in almost 30 years, mostly due to the extraction process of fracking which has enabled a major increase in production. This has coincided with no curbing of production from other major Middle Eastern oil farms as well as a decrease in demand from oil importers China, Japan and the European Union on account of slow economic growth.

Of course, these colliding factors have inevitably resulted in an oversupply of oil, however rather than cutting production to create demand, Saudi Arabia oil cartel OPEC is showing no signs of reducing production in a bid to push out competition.
Saudi Arabia, the world’s largest oil exporter and OPEC’s most influential member, has deep pockets and so can withstand lower prices for some time. The same can’t be said for some of Saudi Arabia’s international competitors who they’re currently pressuring – although this move also puts pressure on other OPEC members such as Iran, Iraq and Nigeria.

Winners, Losers And Australia

Oil is a way of life and a means of economic prosperity for many of the world’s nations. The downturn in oil value impacts majorly on the global economy, not to mention individual governments and businesses.

Oil producers such as Russia, Nigeria and Venezuela, the latter which relies on oil for 96 per cent of its exports revenue, are currently in big trouble. Poverty, civil unrest and increased crime are already on the rise and will only worsen if oil prices do not recover.

Energy companies have also felt the pinch, with billions of dollars erased from international share markets overnight.
On the other hand, major importers such as Europe, China and Australia could experience greater economic output and advantages, some predict. In Australia, the cost of travelling on planes, buying fruit and vegetables and many other services could soon drop.
However, lower petrol prices also means less revenue for the Government, meaning potentially more strict cost-cutting measures to reduce the deficit. Meanwhile, both here in Australia and abroad, deflation is becoming an increasing worry as the general price of goods and services drops. Deflation can reap havoc on economies, increasing recession and debt.

What’s Next?

What’s clear is that the simple occurrence of cheaper petrol is in fact not that simple at all. It’s rather the product of an intricate and multi-faceted chain of events that are largely being controlled by the major oil companies. How far will the price of oil drop, what will be the outcome for consumers, businesses and entire countries?

The clear winners in Australia right now are consumers enjoying lower prices and businesses benefiting from increased spending. However, if oil prices continue to plummet in the long-term, circumstances may be different. Whilst many predictions are being made about what will unfold in the next 12 months, ultimately only time will tell.

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