Monday, October 20, 2014

The effects and consequences of the recent falling oil prices

During the past week there have been numerous reports on the possible effects and potential consequences of falling oil prices, currently around US$82 having been below US$80 [] earlier this week. Many people and with that businesses and governments had come used to US$100+ prices.

The economist [] wrote last week about the consequences of high-investment projects, that rely on higher prices to be profitable (in the long run). This includes shale in the US which on average runs on projects that break-even at US$75 [], although there is obviously variations among project, and oil-spot prices may be less relevant as producers have there prices hedged using options and forward contract.

Russia relies on US$100+ oil to balance its books, although it's floating ruble and accumulated reserves will form a cushion for the immediate future writes mr. Guriev (a Russian economist currently at Science Po) in the FT [].

One of the reasons oil prices are down is probably the same as the reason for abysmal stock-market performance in the last month or so, with major losses during the past week: expected weak demand from a slowing world economy. Nevertheless, the CEO of BlackRock, a major US investment institution, Fink saw the silver lining []: "It's a good buying opportunity (...) the oil price decline is a tax cut for global consumers."

This week's Economist [] asks whether it is indeed lower demand that brought oil prices down, indicating a slowing economy, or increasing supply from OPEC, the US and even Russia. Boringly, as always, probably a bit of both. All of the potential consequences mentioned above will only realise, if at all, when the price of US$100 will become the new normal for the foreseable future, or whether instead it is the large price swings in relatively short period, i.e. volatility, that is the major feature to follow.

No comments:

Post a Comment

Reactions welcome! Please use your full name.