The Winners And Losers In Low Prices Of Oil

The steep decline in the prices of oil is always an interesting topic for discussions. When I met with these guys from we got to talking about the impact of the low oil prices on business and consumer spending based on the latest breaking news.

The general consensus is lower prices of oil is good for the economy but the truth is there are winners and losers. For Australia, the impact on energy exports and capital imports are complex. A US$40 decline in oil prices will equate to an income transfer of around US$3 trillion from oil producers to oil consumers. If the 40% cut in oil prices is sustained it is generally assumed to increase global GDP by at least 80% per annum.

The favorable effects of low prices of oil are the increased propensity for consumers to spend. On the other hand, low prices of oil will force the government to curtail programs and subsidies because oil companies who are financing these ambitious public spending programs have limited ability to sustain the projects from their oil incomes. A stronger dollar may offset some of the benefits of low oil prices to reduce savings. A factor that is often overlooked is that in local currency terms, oil was still trading at near record highs until very recently particularly in emerging markets.

Low oil prices will also reduce investments in energy exploration, development and production. Oil producers are already reducing costs and renegotiating contracts with oil service groups. This lower level of spending will have an adverse effect on activity and growth.

In Australia, the low prices of petrol are offset by lower prices in energy exports like LNG and coal, because their prices are linked to oil. Lower investments in the commodity sector and the deferral of existing projects will reduce the benefits gained from low oil prices. The Australian Stock Market has a high concentration of resource companies and banks that lend to these businesses. This means that any problems in the energy sector will affect the income from and value of the financial investments. A large movement in oil prices also has the potential to create significant financial instability particularly in debt markets.