The Focus on: Oil

Since June 2014, the price of oil has continued to plummet and this has been a major focus for economic observers. The West Texas Intermediate (WTI) oil price (a grade of crude oil that is used as a benchmark for the price of oil), has fallen by 57 per cent – a staggering decline which hasn’t been seen since the global financial crisis.

What’s caused oil prices to plummet?
The main factor is the shift in supply and demand. Global demand for oil has been weaker than expected (particularly in the weakening economies of Europe and Asia) and this has coincided with increased production in the US and Canada (countries that initially wanted to take advantage of the high oil prices).

Despite the falling prices, the Organisation of Petroleum Exporting Countries (OPEC) has not been willing to cut production (which would help to prop up oil prices) and, as a result, prices have continued to fall.

What is the effect of a falling oil price?

In Australia, as oil exploration budgets and returns from new oil production projects decline, the sector servicing the industry is under pressure. For example, the market capitalisation of Australia’s WorleyParsons – a major provider of services to the Canadian oil sands producers – has halved to $2.2 billion. As oil prices decline, so too do the taxes and royalties that governments collect from the producers. Governments that rely on oil taxes, such as Russia,
Alaska, Iran and Venezuela, experience a fall in tax receipts and this can affect government budgets and spending plans.

Fiscal pressure can impact politics and, as politicians come under pressure from the population, geopolitical risks increase.  In Australia, the federal budget is already strained by lower iron ore prices and will likely continue to be under pressure due
to declining oil prices.

On the plus side, consumers benefit from lower oil prices at the petrol pump where fuel prices have been the lowest they’ve been in years. Similarly, airlines and other transport companies benefit from the lower petrol prices as it lowers their overall cost bases.

oil price