The fall in oil has brought the economists out of the woodwork to make judgements on how good or bad it is for your pocket and the economy overall. One thing we know is certain is that falling prices in any commodity is very rarely good for everyone.
The FT has an interesting article today explaining who the actual winners and losers are.
There’s basically three sides in the mixer.
- Producers
- Users
- Governments
Producers are the ones that have the biggest say in prices. They need oil at a certain level to make it cost effective and profitable to get the black stuff out of the ground.
The users are many, from industrials, to refiners, to you and me, and in most cases we benefit from lower prices
Governments are the ones that stand to lose a chunk as well when prices tumble. In the UK our petrol prices are taxed to the hilt. Nearly 80% of the pump price is tax. If oil falls and petrol prices fall then so do tax revenues. Governments of producing countries also lose. For some, like Middle Eastern countries, it’s their main, if not only source of income. For others, like the US, it puts the squeeze on investment into projects such as shale as the final selling prices don’t justify the costs.
The benefits and drawbacks are many and overall the fall in prices is very good for most economies in general, especially importing countries, but there are plenty of risks too. As the FT point out, Brent at $80 would cost OPEC countries around 20% of their $1tn earnings.
The drop in oil prices could be just what Europe needs to give itself a little kick in the economy as costs to households and businesses fall. It’s a bit of a false economy and not one that is usually sustainable or more importantly controllable but Europe needs all the help it can get right now. For us in the UK, we’ll watch oil crumble 50% in price then moan that only £0.02p has come off pump prices as the petrol companies rip us to bits. I’m looking forward to only paying £84.00 instead of £87.00 to fill the car up
The FT article is here and available with a free sub
In the meantime Brent has been down to 83.68 in the Dec futures (83.34 Nov) and getting closer to the magic $80 number. Even for oil this has been a very big and fast fall and the biggest since the 31% drop in 2012.
Brent crude monthly 15 10 2014
This is another market that I’m now getting a “buy” vibe for. There’s two points on the chart above that will be important for Brent. While $80 is the talked about number the tops of those bars at around $78 look to be greater support, same as further down at $75.
The time may be approaching to buy oil for a decent bounce but it won’t be a trade to run back up to $100 until the fundamental landscape changes. I’m toying with starting to build up longs here and down towards those levels but I might hang out for a better first entry point. It depends on how my patience is.
