As we write this article, the price of Brent crude oil has fallen to $54 per barrel. Just a year ago, the price stood at more than $100 per barrel. As recently as November, it stood at in excess of $80 per barrel.
The fall in the price of oil has been dramatic and has caused a number of knock-on effects. As investors, it pays to be aware of these impacts and to look ahead to what may happen in future.
The impact on Russia
There has been considerable focus on the impact of this fall on the Russian economy. There is no doubt that the Russian economy has been hit hard and that this reflects the dependence of that economy on oil exports. Clearly, the falling price of oil is unhelpful to the wider Russian economy.
It is predicted that Russia will enter recession during the course of the year, although it’s noted that policy makers have resisted the temptation to decrease oil supplies. With some estimates suggesting that each dollar fall in the price of a barrel of oil wipes out $2 billion in revenue for the Russian economy, there is no doubt that Russia is feeling a certain amount of pain.
Interest rates have risen, in order to shore up the currency, which will certainly make it more difficult for Russian businesses to raise capital and to be successful.
The falling oil price is, in part, a reflection of increased levels of extraction in the United States. The use of fracking has seen production levels sore, flooding the market with cheaper oil.
But there is an aspect of this change that causes concern for US producers: fracking is more expensive than traditional forms of oil extraction and there are fears about whether some new entrants to the market can remain profitable as these levels, as the price of oil continues to drop. Some suggest that the OPEC group are happy to allow the oil price to settle at a lower level, in the hope of driving some US fracking operations out of business.
It’s notable that Saudi Arabia, the world’s largest oil producing country, has not taken the step of reducing production. A reduction in Saudi oil production would undoubtedly support the oil price. So why have the Saudi government not reacted in this way?
As mentioned above, they may be playing a longer game here and be looking to apply pressure to US producers.
Back in the UK
There has been some talk of North Sea oil platforms being taken out of operation, simply because oil extraction off the coast of the United Kingdom is relatively expensive. Such decisions will clearly put UK jobs at risk.
Consumers, however, will continue to benefit from lower oil prices in the short-term. Many of the products that are sold in the UK’s shops, for example, are now being produced for less money. The cost of energy and petrol for residential and commercial users has also been dropping. With more money in the pockets of UK residents, as inflation tumbles, it may be that those consumers are in a position to spend, which should benefit some UK businesses.
Are you heavily exposed to businesses that rely on oil prices staying within a particular range? As ever, diversification may be the key. But the reality is that so many businesses and markets are impacted by oil prices that it’s hard to escape the need to look more closely at this issue.
What does the future hold?
Analysts have mixed views, with many predicting that oil prices may yet go lower. Others predict that market forces will almost certainly mean a longer time increase to the sort of relatively stable levels that we’ve become used to during the course of the past few years.
When you look into your own crystal ball, what future do you see for oil prices? Your own investment decisions may well depend upon that particular vision.