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WHEN FILLING UP your car at the petrol station you may have noticed you are getting more for you buck.
In a fall, rarely seen in the market, oil has lost more than half its value since June and yesterday the price of Brent oil sank under $50 per barrel for the first time since 2009.
But why is this happening all of a sudden and what does it mean for you and the wider economies of the world?
Let’s take a look.
OPEC’s decision
One reason for prices falling is due to the stance taken by OPEC (Organisation of the Petroleum Exporting Countries) – the intergovernmental organisation dedicated to stability in and shared control of the petroleum (basically, they control the supply allowed) – who decided not to cut its daily production target on 27 November, which resulted in prices plunging to post their steepest one day fall since 2011.
OPEC opted to keep its oil output ceiling at 30 million barrels per day despite ample global supplies.
Analysts said the move was aimed at stifling competition from new market players with higher costs — in particular US shale oil producers.
Former Wells Fargo Chairman and CEO Richard Kovacevich told CNBC on Tuesday that the refusal by OPEC to cut production in the face of prices plunging shows the cartel is looking to put a lid on the US fracking boom. No matter what the reason, this is one of the contributory factors to falling prices.
However, OPEC kingpin Saudi Arabia blamed weak global economic growth and said it will stick to its guns on production policy.
“The move below $50 shows how momentum is everything here,” CMC Markets analyst Michael Hewson told AFP.
“With no sign that OPEC will do anything about over-production, it seems likely that we could well see further declines towards $40 in the coming weeks — particularly given that demand shows no signs of picking up.”
Weak demand
While there is an oversupply of oil, this is twinned with weak demand.
Weak growth and weak demand in China and Europe are likely to continue to be the main drivers as the battle for market share intensifies.
“We’ll probably still see sharp swings in the interim but the direction of travel seems clear, unless OPEC acts,” said Hewson.
Eurozone stability
Implications of a fall in oil prices are big for both the markets and the economies of oil producing nations. The stability of Russia’s economy, which is extremely reliant on oil, is already feeling the effects, with its ruble hitting the floor, while Venezuela are praying the price won’t fall any further.
The markets are also showing concern for the stability of the eurozone, with fears Greece will exit the Eurpope, making Europeans get less buck for their euro and the euro hitting an almost nine-year low against the US dollar.
The euro is currently at its lowest level with the dollar since about 2009.
This has pushed consumer prices in the eurozone down, falling 0.2 % in December, entering negative territory for the first time since the depths of the financial crisis in 2009, EU data showed today.
The drop, brought on by plummeting oil prices, is the first concrete sign of much-feared deflation in the now 19 nation currency zone. Deflation is officially defined by prices falling over a longer period.
Why have petrol prices I am paying for not fallen more?
One would think that the immediate impact of falling oil prices is that petrol prices will follow suit. They do, to a certain degree, but it all depends on what country you live in, as remember, a lot of the price you are paying for at the filling station is tax in the form of VAT.
In Ireland, when both excise duty and VAT are added together, it amounts to 59% of the price of petrol. This is down from 61% in 2004, according the the Department of Finance.
This is why we don’t see quite a big fall-off as in other countries like the US who tax gas at a low rate.
Where is Ireland in all this?
Bloomberg reports that while oil-producing nations may be suffering, consuming countries (that would be us) are taking advantage of low petrol prices. Here’s the impact on a country’s GDP (including Ireland) with a barrel of oil costing $40 per barrel:
Bloomberg Business / TwitterHow $50 oil changes almost everything http://t.co/N924K3qWx9 pic.twitter.com/AR0XBBh569
— Bloomberg (@business) January 7, 2015
When all these factors are combined together, it has resulted in a fall in oil prices, and while it is positive for us, the consumer when we are filling up the tank, it will lead to bumps in the road over next few months for the world economy.
How low can it go?
Business Insider states that Saudi Arabia produces oil at less than $10 per barrel in extraction and investment costs. The oil price was in this region as recently as the late 1990s.
A late 1990s dollar is worth more than a 2010 dollar due to inflation, but in terms of the costs involved, there’s no impossibility to $20 oil. That might not be likely (and very few people are predicting it), but there’s no iron law stopping oil prices from falling much, much further.
Additional reporting AFP, Business Insider and Associated Press.
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