Repost from The Columbian
World economy gets unexpected stimulus
By Pan Pylas, Associated Press, November 4, 2014
LONDON — Oil prices slumped to multi-year lows on Tuesday after Saudi Arabia cut the price of oil sold to the U.S., a move that is shaking an already volatile market but will likely give the world economy an unexpected stimulus.
The 25 percent or so slide in oil prices since the summer could boost consumer spending and business investment in many economies around the world as fuel bills fall.
But not everyone’s a winner. Oil-producing countries such as Russia and Venezuela, which have high extraction costs and whose budgets rely on assumptions of relatively high energy prices, stand to lose out. And lower prices could eventually slow down booming production in the U.S., offsetting the benefit of lower energy costs for consumers and businesses.
U.S. oil dropped another 2 percent Tuesday to $77.19, at one point falling to $75.84, the lowest level since October 2011. It was trading at $100 a barrel as recently as July. Brent, the international benchmark, declined 2.3 percent, to $82.82, having earlier fallen to $82.08, its lowest level in just over four years.
Adam Slater, senior economist at Oxford Economics, reckons the recent fall in oil prices, if sustained, could add around 0.4 percent to gross domestic product in the U.S. in two years, and a little less in Europe. China, which is the second-largest oil consumer and on track to become the largest net importer of oil, could see GDP 0.8 percent higher than it otherwise would have been.
“This is similar to a surprise stimulus,” said Slater.
Though a drop in demand is a factor in the current slump amid concerns over global growth, Slater says supply-side factors are having a much bigger impact than back in 2008, when demand plummeted as the global economy tanked. The rise of fracking in the U.S., the return of oil output from Iraq and Libya, and Saudi Arabia’s willingness to resist production cuts have combined to weigh on prices.
On Monday, Saudi Arabia, OPEC’s largest oil producer, cut prices for customers in the U.S. The move has been interpreted as an attempt by the country to maintain its market share in the world’s largest economy against supplies from the likes of Canada, Mexico and Venezuela and U.S. shale oil producers.
Phil Flynn, senior market analyst for the Price Futures Group, said Saudi Arabia’s move was directly aimed at those U.S. producers, who have boosted U.S. oil output to the highest level in decades. As a result, U.S. imports of crude oil from Saudi Arabia dropped to 894,000 barrels a day in August, down from 1.3 million barrels a day in the same month a year ago.
Saudi Arabia is “threatened by U.S. oil production and they are acting to try to break the U.S. producers’ back,” Flynn wrote in a daily newsletter to clients.
The drop in oil reverberated in the U.S. stock market. The Dow Jones transportation average rose to a new high of 8,870.90 in morning trading. Airline stocks such as American Airlines and United Continental gained close to 2 percent. Meanwhile, major oil companies such as Exxon Mobil and Chevron fell about 1 percent, while Continental Resources, which primarily operates in the U.S., fell 7 percent.
Russia and Venezuela are two countries that are considered particularly vulnerable to a sustained fall in prices as their economies are highly dependent on oil. And because their costs of production are high and baseline budget plans are considered optimistic, analysts say they stand to lose more than, say, the Gulf states.
Lower tax revenue from the fall in prices could derail public finances, potentially prompting government spending cuts or tax increases that can hurt growth.
OPEC members are due to meet on Nov. 27 in Vienna, Austria, but investors doubt the cartel will be able to agree to any reduction in production quotas given Saudi Arabia’s actions. That is another reason why oil prices have remained under pressure and why many analysts think this oil price retreat may be longer-lasting than a previous bout of weakness seen in 2012.
“This time, the fall should stick a little bit more,” said Slater.