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Falling oil prices - the benefits and the costs
Here’s a startling statistic. Since July, the plunge in the oil price has engineered a net transfer of income from energy producers to consumers worth close on $1.5 trillion a year. The figure is reached by taking the fall in the oil price – around $42 – and multiplying it by global demand – around 94 million barrels per day. Add in the declining cost of coal and natural gas, and the net transfer is even higher – possibly something equivalent to the entire annual GDP of Britain.

Not that you’ll necessarily see this in your fuel bills. Already Britain’s big utilities will be lining up their excuses for failing to hand on the full extent of these falling global prices; long term forward contracts will have locked many of them into much higher prices than now rule.

The same is true of airlines, where fuel costs are a substantial proportion of the overall price of a ticket; many will already have bought their fuel forward at a higher level. There is a big difference between the current price for oil and gas, and the one many big users are contracted to pay.

None the less, for the global economy as a whole, the plunge in the oil price – dragging other energy costs with it – is a seismic and potentially transformational event. Down the decades, we’ve seen many upheavals in oil markets, but few to compare with the speed and depth of the latest correction. It’s like the oil price shocks of the 1970s, only in reverse, with consequences – many of them unpredictable – which may be of a similar order of magnitude.

Most commentators have so far tended to focus on the positive aspects of this phenomenon. Theoretically, falling oil prices should be powerfully reflationary, leaving more money in the pockets of companies and consumers just as a similarly sized tax cut would. Also on the plus side, depending on where you stand, the oil price slide removes a potent source of asset price inflation.
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