How Crashing Oil Prices Affect Your Pocket

oil

 

Oil prices are expected to plummet as low as $10 in 2016. How does it affect you?

Until recently, economists spoke about Peak Oil and the risks we would face as fossil fuels dried up. However, thanks to technologi- cal advancements, production methods improved and we gained access to oil that was previously inaccessible. A glut in supply resulted in a temporary mute on discussions of Peak Oil. A glut in supply is a controversial topic, with economic and environmental repercussions that are valiantly defended from both sides, based on their level of innovation and forward-thinking. When crude oil reached $147 (€136) a barrel in 2008, speculation was rife as to what would happen if it hit $200 a barrel. However, Lehman Brothers crashed, along with the global economy, as oil prices continued to plummet to all-time lows. The plummet is ascribed to a global oversupply, as well as to a drastic economic plateau in China. The slow performance of countries that usually consume high volumes of oil is another contributing factor to the oil price that has achieved its lowest level since 2003.

By mid-January, crude oil prices continued on a downward spiral, dropping by nearly 20% since the beginning of 2016 as econo- mists scramble to try explain it all and adjust their forecasts accordingly. Case in point, Barclays had to drastically adjust their 2016 forecasts to $37, which is significantly lower than their initial predictions of $56 to $60 a barrel, while Standard Chartered’s experts predicted that oil prices could go to a low of $10 a barrel.

What does the price of oil hold in store for Irish consumers?

Exactly how will we be affected if the oil price continues to fall? Let’s take a look at what to expect.

1. Diesel and Petrol Prices

The most obvious way in which we will be affected, will be when we fill up our cars. While we have seen some significantly falling fuel prices in recent months, many of us would like to see it come down a lot more. The average petrol price is €1.25 and Pumps.ie shows that some garages sell it for under €1.20. According to the AA, we paid €1.70 in late 2012. With the average car doing approxi- mately 19,000km per year. If it consumes fuel at 9.5 litres per 100km, the car will consume 1,800 litres per year. Based on these figures, the average Irish driver will save €810 more on petrol in 2016 than would have been the case in 2012.

2. Spending More Money

With €810 in petrol savings, we will have much more spending power that will boost the wider economy. This should make up for the increased spending leading up to Christmas. With approximately 2 million private cars on our roads, each saving €800, there should result in a €1.5 billion net transfer of wealth by this time next year.

3. Improved Economy

All of the above might have been more exciting, if it weren’t for taxes and the exchange rates. We buy oil in US dollars, which means that Irish prices depend on how well the euro performs against the dollar and that has not been great in recent times. Investors put their money into safe havens, such as the dollar, when the oil price falls. This has helped the US currency to become stronger. In the past 18 months, the euro lost approximately 20% of its value against the US dollar, which has prevented petrol prices from dropping as low as they could have. Since October 2008, when an emergency budget was instituted, we have seen five fuel tax increases, which have not helped matters, as fuel has increased by around 20 cents a litre. Fuel excise duties are levied on a per-litre basis, rather than as a percentage of the total price, so even when the petrol price goes down, we pay the same amount of tax. We pay 23% VAT on non-tax fuel prices, and this falls along with other price drops. At the end of the day, approximately 91 cents out of every litre of petrol goes towards tax, while the remaining balance of around 30 cents, pays for everything else.

4. Lower Inflation

Most people talk about the benefits of lower petrol prices being a major benefit of plummeting oil prices, but it really benefits the entire economy. Paying lower oil prices has contributed to Ireland’s economic recovery and 7% growth in a time marked by historically low inflation. As an oil importer, lower prices help reduce costs for businesses and consumers alike. The only downside is that plummeting oil prices could result in deflation across Europe, and that will impact future growth.

5. Falling Gas & Electricity Prices

In recent months, we have paid less for energy, although prices have not dropped at the same speed as fuel prices. Energy compa- nies have been quick to let consumers know about their recent price cuts. However, the average household has only seen a reduc- tion of about €50 a year, which amounts to an approximate decline of only about 5%. Of course, every cent helps, but when you consider the reductions in raw material costs, you would be justified in expecting more savings.

Alex White, Minister for Energy, discussed the speed of wholesale energy price reductions reflecting in savings on household bills, but there was no significant change. This, too, is expected, as prices are not being regulated, so there is not much more that can be done about it.

6. The Flipside
There’s a downside to falling oil prices that bring us more money; cheaper oil offers little incentive for people to find more natural alternatives to fossil fuels. When oil prices spiked in the 1970s, developed countries faced massive economic disruptions, particu- larly in the US. Research on energy savings was all the rage, and ten years later, clean energy alternatives started paying off. Energy efficient solutions for electricity and cars were introduced and everyone enjoyed the benefits. Unfortunately, low oil prices removes the incentive to developer cheaper alternatives, and research stops. The next generation will feel the ripple-effects.

7. Reduced Incentive to Develop Gas & Oil Fields

The upsurge in oil supply in global markets could partly be attributed to a dramatic increase in the production of shale oil in America, and this is a costly exercise. Producers require oil prices to be higher than $60 a barrel. However, when the oil price is much lower than that, shale oil production becomes less attractive. If there is no longer an incentive to develop oil and gas fields, R&D will inevitably reduce, leading to costs when the oil price rebounds.

travel, oil

travel

 

8. Cheaper Travel 

Ultimately, air fare should becoming cheaper. This has not yet been evident, as airlines claim that they buy their fuel far in advance, resulting in a time lapse in passing on the savings to their passengers. Fact remains that the oil price has been sustained at a lower rate for over a year now, which suggests that airlines have failed to drop the prices, and with a strong demands for seats, it is unlikely that they would drop the fares, even though they are more than able to do so.

9. Cheaper Food

The agricultural industry relies on energy for everything from managing poultry production to managing the dairy and ploughing the fields. When oil prices are low, farmers are able to pass the saving on to consumers by providing cheaper food, once the supermarkets have claimed their share.

10. Carbon Emissions Increase

Cheap oil encourages car buyers to opt for gas-guzzling SUVs, rather than smaller, fuel-efficient cars. This causes an increase in carbon emissions.

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