Oil is well and truly off the boil. In early October it reached a four-year peak of $86 per barrel. Since then, it has fallen by a third to a one-year low of around $60 a barrel. The 20% slide this month has put it on course for its worst month in four years.
US sanctions on Iranian oil exports have removed far less oil than expected from the global market. “Everyone was pumping oil as hard as they could because of worries about the Iran sanctions, but then there were exceptions for Iran’s eight biggest customers,” Cornelia Meyer of Meyer Resources, told the BBC’s Today programme. The US granted waivers to allow Iran’s largest oil buyers – including China, India and Japan – to continue importing from the Islamic Republic. “That led to excess oil in the market.”
The oil cartel Opec, which produces about a third of global output, could consider cutting its output to prop up prices in a meeting on 6 December. But the group “is under pressure from President Trump to keep prices low”, says Emily Gosden in The Times. US producers have increased their output recently, while estimates of global demand have fallen as growth appears to have cooled.
The oil-price retreat bodes well for US household spending, which accounts for around 70% of the economy, because consumers will enjoy lower petrol prices. Meanwhile, says Justin Lahart in The Wall Street Journal, lower prices will have a less negative impact on the US shale sector than in 2014 because production is more efficient now. The industry employs fewer people and makes up a smaller share of overall capital spending. The bottom line is that “the negative economic impact of falling oil prices is less significant than it was four years ago, while the positive aspects are just as strong”.
Who else benefits?
The drop in oil prices should also benefit emerging markets that are oil importers, such as South Africa and India, says William Jackson of Capital Economics. Every $10 per barrel fall in oil prices boosts GDP by about 0.5%-0.7% in major emerging markets that import oil, such as Turkey, Korea, Chile, the Philippines and Thailand, he reckons.
The big losers are countries that export oil. Every $10 per barrel drop in the oil price could lower the economic output of the Gulf states by an annualised 3%-5% a year and the United Arab Emirates, Russia and Nigeria by 1.5%-2%.
On a global scale, the upshot should be a small net boost to growth from lower oil prices, adds Andrew Kenningham, also of Capital Economics. Households will profit from lower inflation while any decrease in investment and tightening of fiscal policy in emerging market oil producers “should be very small”.