Aglut of oil, the demise of Opec and weakening global demand combined to make 2015 the year of crashing oil prices. The cost of crude fell to levels not seen for 11 years – and the decline may have further to go.
There have been four sharp increases in the price of oil in the past four decades – in 1973, 1979, 1990 and 2008 – and each has led to a global recession. By that measure, a lower oil price should be positive for the world economy, with lower fuel costs for consumers and businesses in those countries that import crude outweighing the losses to producing nations.
But the evidence since oil prices started falling from their peak of $115 a barrel in August 2014 has not supported that thesis – or not yet. Oil producers have certainly felt the impact of the lower prices on their growth rates, their trade figures and their public finances butthere has been no surge in consumer spending or business investment elsewhere.
Economist still reckon there will be a boost from a lower oil price particularly if it looks as if the lower cost of crude will be sustained.
Dhaval Joshi, an economist at BCA, a London-based research company, said: “A commodity bubble has deflated three times in the past 100 years: the first was after world war one; the second was after the 1980s oil shock; the third is happening right now.”
For the big producer countries, this is a major headache, the ramifications of which are only starting to be felt. Oil powers base their spending plans on an assumed crude price. The graphic below shows just how far below water their budgets are.
Joshi says crude prices may fall by a further 35% to reach its long-term trend. That would mean an oil price closer to $25 a barrel - and fiscal crises in some of the world’s most pivotal economies.
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