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November 29, 2014

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Home » Business » Economy

Drop in oil price offers bonus and concerns

A renewed plunge in oil prices is a worrying sign of weakness in the global economy that could shake governments dependent on oil revenues. Yet it is also a bonus for consumers as prices fall at the pump, giving individuals more spending money and lowering costs for many businesses.

The latest slide was triggered by OPEC’s decision this week to leave its production target at 30 million barrels a day. Member nations of the cartel are worried they’ll lose market share if they lower production.

Partly because of the shale oil boom in the US, the world is awash in oil but demand from major economies is weak — so prices are falling.

Brent crude, an international benchmark, was at US$72.50 a barrel yesterday, down nearly 30 percent in the past three months and at its lowest in four years. US crude oil slid 6.2 percent to near US$69 a barrel yesterday and is down 27 percent over three months.

Overall, the slide will come as a boon for consumers in oil-importing regions like Asia and Europe. But there are also some possible negatives.

Many of Europe’s economies are net importers of oil, so lower prices are likely to give a welcome, if small, boost to growth. Cheaper energy reduces costs for industry and puts more money in consumers’ pockets. That will be particularly useful in the 18-nation eurozone, where unemployment is high.

In Germany, the price at the pump for Super E10 fuel has fallen from 1.53 euros (US$1.91) per liter at the start of September to 1.42 euros per liter this week, said the ADAC motoring body.

Dropping fuel prices also, however, add to one of the eurozone’s biggest headaches: low inflation. Weak inflation makes it harder for troubled economies like Greece to reduce debt.

The few European countries that do produce oil — mainly Britain and Norway in the North Sea — face a drop in revenues that could balance out the positives of cheaper fuel.

Russia gets about 50 percent of its state revenue from oil exports, so the government’s concerns are clear. Its economy is already sliding into recession under the impact of Western sanctions and investors are pulling money out.

Officials for the moment are putting on a poker-face — Putin said yesterday that “I’m sure the market will become balanced by the middle of next year.”

For Russian consumers, the outlook is mixed. Prices at the pump have actually risen in the past few months, in line with a rise in inflation that has been fueled by the drop in the ruble. In local money, 95-octane gasoline costs 35.99 rubles (73 US cents) a liter in Moscow, up from 35.53 per liter two months ago.

In Japan, which is a net importer of oil, gas at the pump is still relatively high as it takes some time for cheaper crude prices to filter down to consumers. Also, a drop in the yen’s value will cut the savings Japan can reap from lower oil prices.

The Chinese government adjusts retail prices in line with the global market. As a result, China has cut prices repeatedly this year.




 

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