TUMBLING OIL: ‘ON ITS WAY TO $50 a BARREL’

Scot-Buzz editor BILL JAMIESON finds the silver lining behind the falling oil price cloud…

$90 and falling, then $80 and still falling: the price of Brent crude has now sunk to $78.74 a barrel. Far from this being a ‘temporary blip’ the 29-country International Energy Agency believes we are seeing a major step change in the price. “Downward price pressures”, it says, “could build further in the first half of 2015.”

In the US there is talk of rising reserve stocks, and that the price “will likely continue to fall in the coming months to as low as $50 per barrel”.

Alarm bells are sounding. It will push us into deflation.  It will blow the budgets. It smashes all those SNP budget projections. And it blows a big hole through the rival attractions of shale oil and wind power.

Pass the Kleenex and weep. For there’s nothing more depressing in life than seeing a silver lining as just part of a bigger cloud.

Certainly the plunge in the oil price has defied all predictions. It has now fallen more than 30 per cent from its summer peak of $115.

Back in May, as the independence referendum battle raged, the Scottish government was touting forecasts for 2016-17 which had $110 a barrel as its central estimate. The lowest price it envisaged was $99.

Now the price slump has blown a hole in its independence budget plans reckoned at £8 billion – and this before the latest fall in the price over the past two weeks.

Last  Thursday the U.S. Department of Energy reported that oil production in the United States rose to its highest level in 29 years to just over 9 million barrels per day. To put that in perspective, the U.S. is now nipping at Saudi Arabia's heels, with that country currently producing about 9.6 million barrels per day

That is why, according to John Kilduff  partner at US investment group Again Capital that specialises in  commodities, oil prices “will likely continue to fall in the coming months to as low as $50 per barrel”. The surge in U.S. oil production is due to hydraulic fracturing which has liberated millions of barrels of oil and millions of cubic feet of natural gas from fields that were thought to be bereft of fossil fuels. This and key pipeline upgrades “have been so impactful that, at times, Gulf Coast storage facilities have been nearly filled to capacity.

All this, a downward deflationary twist and a red light now flashing on future oilfield development plans unless the price rallies soon – the news could hardly be worse.

Except, of course, for millions of motorists now seeing lower prices at the petrol pumps, relief for households struggling with fuel bills – and businesses big and small across the land enjoying a fall in their energy bills and transport costs.

Prices at some supermarket forecourts have fallen to 119.7p a litre – the first time the price has dipped below 120p in four years.

But won’t this add to deflation and slow the economy?

That looks unlikely, given that any money saved on filling up petrol tanks, or even on manufacturing products, is less likely to be saved as spent on something else – giving a boost to overall demand. 
The fall in the cost of living works to give consumers more discretionary income. This is especially true in a period when real (after inflation) wages have been stagnant.

A fall in oil prices thus effectively works like a free tax cut, boosting GDP, and should help mitigate the slowdown in growth evident during the autumn.

Nor is the benefit confined to the UK. According to Tom Helbling of the IMF, a 10 per cent change in the oil price is associated with a change of around 0.2 per cent in global GDP.

Such a fall, coinciding with worries over a global growth slowdown, should work to boost GDP by shifting resources from producers to consumers, who are more likely to spend their gains than wealthy sheikhdoms.

And remember that oil is a big cost for all sorts of production industries. So lower oil prices make it possible to produce more GDP with existing technology, bringing indirect, more diffuse benefits as they work to lower production costs.

Now there are caveats to all of this.

It may be that Saudi Arabia at a critical OPEC meeting on November 27 will announce a tightening of supply to help drive the price back up. But the near-term price is subject to many other influences - lower demand in China, Middle East geo-politics, the impact of US shale gas and global growth slowdown – that it is impossible to predict with certainty.

Drivers meanwhile  are quick to spot that the percentage fall in petrol  pump prices are lower – and certainly slower – than the percentage fall in the crude oil price.

It’s a rude reminder that the biggest element in the price of petrol is taxation - currently around 65 per cent of the cost of a litre.

And even this dwarfed advantage may be further reduced if the government opts to re-introduce the fuel duty escalator. It has indicated it would consider this were the price to fall below $75 a barrel. With the price hovering just above $78 - and the government strapped for cash – this could well be an early tax rise runner after the election next May.

Impossible?

Figures from HM Revenue & Customs show corporation tax revenues from the North Sea have fallen from £4.4 billion in 2012-13 to £3.6 billion in 2013-14.

Now comes another jump in government borrowing in September showing that the deficit, far from declining, had risen by £5.4 billion to £58 billion.

Few motorists are likely to bemoan misfired government budget projections – either at Westminster or at Holyrood – so long as the pump price falls further – and stays low.

The silver lining is not at all the same as the black cloud inside…