LONDON (AP) – Oil prices slumped to multi-year lows on Tuesday after Saudi Arabia cut the price of oil sold to the US, a move that is shaking an already volatile market but will likely give the world economy an unexpected stimulus.
The 25 per cent 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 like 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 US, offsetting the benefit of lower energy costs for consumers and businesses.
US oil dropped another two per cent 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 per cent, 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 per cent to GDP in the US 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 per cent 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 US, the return of oil output from Iraq and Libya and Saudi Arabia’s willingness to resist production cuts have combined to weigh on prices.