Plunging oil prices - that will seen petrol drop below £1 a litre - are creating a new world order
While motorists filling up their cars are the undoubted winners, there are many losers as the price of oil continues to falll
Drivers will be cheering the RAC’s prediction that petrol could soon dip below £1 a litre.
But while the plummeting cost of oil may cut £15 off the price of filling up a family hatch, there are wider implications for the economy and even world peace.
We are addicted to oil, which is why a collapse in prices has sent shock waves around the globe.
Oil prices have crashed by nearly half since June, from $115 a barrel to below $60 a barrel – a five-and-a-half year low.
And there could be more to come as experts forecast the price of oil will carry on falling to $40 a barrel.
Chancellor George Osborne claimed the slump was “overall very good” for Britain, the US and Western economies.
Bank of England Governor Mark Carney called it a “net positive development.”
But while there are plenty of winners from the slump, there are losers too.
Filling up your car
The dipping price has delivered bumper savings for millions of British motorists.
The average price of unleaded in the UK was 116.9p a litre, down from a high of 141.48p a litre in April 2012.
Petrol prices are falling at the fastest rate for six years, though critics say forecourt owners should be passing on even bigger savings.
The Office for National Statistics yesterday said it was one reason why inflation fell to a 12-year low of just 1% last month.
The slowdown was partly due to cheaper petrol and diesel – down around 3p a litre last month – and lower air fares.
Shopping and bills
Fuel price savings are feeding into the cost of goods in shops, as most items are moved by road.
Oil is also used to produce some plastics and packaging, which impacts what we pay for almost everything.
It also has an indirect effect on costs of heating homes as wholesale energy costs are partly linked to oil prices.
This connection is one reason why energy suppliers are under pressure to cut gas and electricity bills.
Experts say households often use savings on fuel and energy to buy other things, boosting the economy.
And with oil prices set to keep falling, there could be more help to come for cash-strapped families.
Savings and pensions
There is a sting in the tail for pensioners or those nearing retirement.
Pension funds, on which millions rely, invest heavily in oil companies as they are seen as a
sure fire investment.
sure fire investment.
But the slump in the oil price has hit the stock market value of industry heavyweights such as BP and Shell.
The share price fall will have more of an effect the longer oil stays low.
Industry
Cheaper oil has saved British firms money.
Office for National Statistics figures showed costs fell by 1% between October and November.
The savings are beginning to feed through, with factory gate prices – which manufacturers charge shops – down 0.1% year-on-year.
Low oil and energy costs, should theoretically make UK companies more competitive against foreign rivals. This should in turn boost exports – important for the economy.
Lower oil prices should in principle also help the flagging eurozone, which we rely on for half our exports.
However, there is a risk that ultra-low inflation could lead to deflation – where prices go
into reverse and actually fall.
into reverse and actually fall.
This can lead to a “wait and see” scenario, where households delay making big purchases in the hope they will fall in price which, in turn, hits the economy even more.
Global economy
A sluggish world economy is one reason oil prices have fallen so sharply.
China’s slowdown in particular worries many experts.
It is now the world’s largest economy – having overtaken the US – and is the largest oil importer.
But falling oil prices have also split oil-producers, between those so rich they can cope with the slump and poorer nations now struggling.
One reason the cost of oil has kept falling is that OPEC, the cartel of oil producing countries, has refused to cut output, leading to a glut of oil on the market.
The club is dominated by mega-wealthy Saudi Arabia, the world’s largest oil exporter.
But the drop is hitting other members hard.
Venezuela, for example, is estimated to be losing £444million for every dollar drop in the price. Nigeria, another OPEC member, is also feeling the heat.
The country still depends on oil for more than 60% of state revenues and 90% of export earnings.
Cynics believe Saudi Arabia is willing to drive oil prices down in order to combat cut-price shale oil production in the US – fracking.
The fracking boom means the US only needs to import 10% of its energy, down from 30% in 2005.
Political tensions
Russia has been a big casualty of the oil price slump.
The full force was felt by Russia’s rouble, which went into freefall, despite the central bank’s dramatic move to raise interest rates from 10.5% to 17%.
The rouble was already under pressure following sanctions imposed by the West after its dispute with Ukraine.
But the sharp drop in oil prices has caused a perfect storm for Russia, with energy accounting for 75% of its exports.
The weakness of the economy – and the impact on living standards – has led to speculation about how President Putin will react.
In the past he has initiated an increasingly aggressive foreign policy to distract from problems at home.
