The price of oil has seen a slippery descent over the last six months, with Brent Crude plummeting from a June 2014 peak of $115 a barrel to $48.81 as of January 18. As an intrinsic part of modern day life, changes to ‘liquid gold’ affects everyone from global to consumer levels.
Profits within the oil and gas sector are being tightly squeezed, with Tullow Oil writing off $2.2bn in its results and many other suppliers cutting back development or exploration plans. Closer to home, it’s thought that North Sea oilfields could be shut down if the price falls even further, with disastrous consequences for the Scottish energy sector. It’s cast some scepticism on Alex Salmond’s outline for an economically independent Scotland. Should the independence referendum have swung the other way, it’s possible that Holyrood would have been hit with a £15.5 billion shortfall.
In previous years, ailing prices would have been propped up by a reduction in supply from OPEC. This time, Saudi Arabia is steering the bloc to a new course, maintaining current production levels and driving world oil prices down even further.
These tactics achieve a long-term double whammy, both pricing out unconventional energy producers with higher operation costs – namely shale and fracking – whilst also destabilising the oil-dependent economy of its chief political rival in the Middle East: Iran. Should OPEC continue this strategy – and Saudi Arabia certainly appears determined to persevere – prices are set to stay low for the foreseeable future, unless the world’s economy picks up, and with it demand.
OPEC’s decision has spelled trouble for non-member Russia. As a heavy exporter of oil and gas, Moscow cannot balance its budget at current prices, despite government spending cuts and a public sector wage freeze. Analysts speculate that the economy will shrink by as much as 5% as the rouble has fallen and consumer prices rise. Western sanctions are exacerbating the problems following Russia’s highly controversial annexation of the Crimea and its involvement in Ukraine. Putin has already started to make overtures to China with multi-billion dollar energy deals, but we could also see him attempting to diversify away from energy.
For those interested in stock market trading and beyond, the increased volatility brings positives and negatives. But what’s happening elsewhere now that prices have halved?
More worryingly, it’s likely that falling prices will see further destabilisation of the Sahel region spanning Sudan, Libya, and also Nigeria. Oil is Nigeria’s chief export, and its currency has nosedived by 13% following the weakness in crude. The government will quite possibly find their ability to act against Islamist group Boko Haram impacted, with catastrophic consequences for civilians in the region.
Less well publicised is the knock-on effect on food prices. Aside from the fuel used to transport produce from farm to store, key agricultural supplies, such as fertilisers and pesticides, are derived from petroleum. The explosive fall in costs means food prices are cheaper than they have been in the last three years. Developing, oil-importing countries such as 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 air tickets, household bills and petrol costs – when reluctant suppliers finally pass on savings. This will be welcome news for those who have been hard hit by rising utilities in recent years. Chancellor George Osborne is said to be watching utilities companies ‘like a hawk’ to ensure reductions are being seen by customers – doubtless as extra pounds in the pocket mean an increase in consumer spending.
Finally, the drop in costs per barrel has triggered downwards pressure on headline 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 usually be grounds for a property boom, most house price indices are currently pointing downwards. Meanwhile, savers are left clutching the short straw, as they face yet another year of stunted interest rates.