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The impact of falling oil prices: good news or bad?

  • 21.03.2016

The stunning drop in oil prices has had significant consequences on all sectors of the economy and in every country. While some of these will be positive, others will give reason to worry.  

From overproduction to falling prices

Over a period of about four years, the per-barrel price of oil remained relatively stable, at around $105. But in summer 2014, it suddenly crashed, tumbling below $40

The sharp drop is due to a combination of several causes
•    Rising production (further increased by unconventional oil)
•    Decline in world demand, tied to the global economic slowdown – especially in China
•    Policy change at OPEC (Organization of Petroleum Exporting Countries), which no longer intends to firm up prices 
•    Stabilization of certain geopolitical factors, which has reduced supply risks
•    Strong US Dollar

And with the end of sanctions on Iran, whose oil will return to the global market, the downward trend is not set to reverse anytime soon! 

A windfall for manufacturing industries 

For manufacturing businesses, the drop in the price of crude has some immediate consequences: falling energy costs enable them to lower prices and attract more orders. That has fueled a moderate but perceptible recovery. 

Other business sectors will also benefit from the price drop as prime consumers of oil products (transportation, as well as chemicals, plastics, etc.) or because they depend heavily on transportation and energy costs (including agriculture). Finally, falling oil prices compensates for the declining Euro, making imports more affordable. 

However, a widespread decline in prices caused by falling oil prices would be cause for concern in the Eurozone, which needs to avoid deflation at all costs.

Oil-producing countries and businesses hit hard 

Tumbling oil prices have also had negative consequences: first of all, in oil-producing countries. 

Venezuela and Algeria, where oil contributes a huge share of national revenue, are now facing critical difficulties. Libya and Iraq, which are also grappling with political instability, are also in trouble. The same goes for Russia. Even Saudi Arabia and other Persian Gulf states are suffering the consequences, forcing them to tap into their foreign currency reserves. 

In every country, falling oil prices have had a sweeping impact across the entire energy sector with curtailed investment budgets at oil companies have destabilized the massive field of subcontractors. For example, in September 2015 Euronews reported a loss of 5,500 jobs in the North Sea oil and gas market since 2014. 

On a global scale, declining oil prices have slowed trade between countries: the WTO cut its global growth forecasts for 2016, due in part to the drop in the cost of raw materials, especially oil. 

But according Patrick Barbe, CIO Core Fixed income at BNP Paribas Investment Partners, the upside from lower oil prices is on the way: “The fly in the ointment is that it will likely take a while before these beneficial effects become apparent, while the crisis in the energy sector still rages on.(…)The upside from lower oil prices is on the way"