The price of oil has seen a slippery decline over the past six months, with Brent Crude plummeting from a June 2014 high of $115 a barrel to $48.81 on January 18. As an intrinsic part of modern life, the shifts to ‘liquid gold’ affect everyone from global to consumer levels.
Profits within the oil and gas sector are being severely curtailed, with Tullow Oil writing off $2.2 billion in results and many other suppliers cutting development or exploration plans. Closer to home, it is believed that the North Sea oil fields could be closed if the price falls further, with disastrous consequences for the Scottish energy sector. He has cast some skepticism on Alex Salmond’s scheme for an economically independent Scotland. Had the independence referendum gone the other way, Holyrood may have been hit with a £15.5bn deficit.
In previous years, the drop in prices would have been driven by a reduction in supply from OPEC. This time, Saudi Arabia is steering the bloc in a new direction, maintaining current production levels and driving down world oil prices even further.
These tactics achieve a long-term double whammy by driving out prices for unconventional energy producers with higher operating costs, namely shale and fracking, while also destabilizing the oil-dependent economy of its main political rival in the Middle East: Iran. If OPEC continues with this strategy, and Saudi Arabia certainly seems determined to persevere, prices will remain low for the foreseeable future, unless the world economy recovers, and with it demand.
OPEC’s decision has spelled trouble for Russia, which is not a member. As a major exporter of oil and gas, Moscow cannot balance its budget at current prices, despite cuts in public spending and a freeze on public sector salaries. Analysts speculate that the economy will contract by as much as 5% as the ruble has fallen and consumer prices rise. Western sanctions are exacerbating the problems that followed Russia’s highly controversial annexation of Crimea and involvement in Ukraine. Putin has already started making overtures to China with multi-billion dollar energy deals, but we could also see him trying to diversify away from energy.
For those interested in stock market trading and beyond, the increased volatility brings positives and negatives. But what is happening elsewhere now that prices have been cut in half?
More worryingly, the drop in prices is likely to lead to further destabilization of the Sahel region which encompasses Sudan, Libya and also Nigeria. Oil is Nigeria’s main export, and its currency has plunged 13% after the weakness in crude oil. The government is likely to be affected in its ability to act against the Islamist group Boko Haram, with catastrophic consequences for civilians in the region.
Less publicized is the domino effect on food prices. In addition to the fuel used to transport produce from farm to store, key agricultural supplies like fertilizers and pesticides are derived from oil. The explosive drop in costs means that food prices are cheaper than they have been in the last three years. Oil-importing developing countries like India or the Philippines, where high food and oil costs are contentious political issues, will be the biggest winners.
On a more granular level, households should see cheaper airfare, household bills and gas costs, when reluctant providers finally pass on the savings. This will be good news for those who have been hit hard by the rise in public services in recent years. Chancellor George Osborne is said to be watching utilities “like a hawk” to make sure customers see reductions, no doubt because extra pounds in the pocket means increased consumer spending.
Finally, the drop in costs per barrel has put downward pressure on general inflation rates. This is good news for homeowners, who have seen a glut of the cheapest fixed-rate mortgages ever seen in the UK. Although this would normally be cause for a real estate boom, most house price indices are currently pointing down. Meanwhile, savers are left hanging on to the last straw as they face another year of stunted interest rates.