This year’s Christmas Break is perfectly timed. Since June, the world’s economic trajectory experienced a game-changing jolt that needs time to sink in. An almost halving in the oil price during the second half of 2014 must have a huge impact on the global economy. Most obviously, the transfer of well north of a trillion dollars from rich oil producers to consumers worldwide will provide a serious boost to asset prices. Add the usual rekindling of optimism that New Year’s bring and January Rally is shaping to be something rather special. With oil prices likely to stay at current levels, or lower, Â for the rest of the year, 2015 could be an economic stunner. – AH Â Â
The most significant development in the world economy in 2014 was the collapse in the price of oil.
The near-50% drop in the price of internationally traded Brent crude from a high of more than $115 per barrel in June to less than $60 earlier this month has put extra money into consumers’ pockets and boosted fuel-intensive businesses such as airlines, while cutting oil companies’ revenues and stoking financial crises in oil-producing countries including Russia and Venezuela.
The roots of the price collapse lie in the US shale oil boom, which began when small and medium-sized producers worked out in 2009-10 how to apply to oil production the techniques of horizontal drilling and hydraulic fracturing that had already been highly successful for natural gas.
US oil production has soared, from about 5m barrels per day in 2008 to 9.1m b/d this month. For the first three years of the boom, the rise in US output was offset by other supplies coming off the world market, but in 2014, however, there were no more such interruptions.
Meanwhile, global demand growth slowed sharply, in part because of the slowdown in China. World oil consumption rose by 1m barrels per day in 2012 and 1.3m b/d in 2013, but is expected to have grown by just 600,000 b/d this year. Saudi Arabia and the other members of Opec compounded the price crash on November 27 by declining to cut production to stabilise the market.
The response from companies has been speedy. Oil producers such as ConocoPhillips and services companies such as Schlumberger have announced cuts in capital spending, employment, or both. BP said it was accelerating its existing cost-cutting programme.
The fall in oil prices is expected to be a net positive for the world economy. However, while the gains are widely spread, the pain will be concentrated on oil producers, leading to consequences that could have wider impacts, such as the collapse in energy company junk bond prices.
Harold Hamm, chief executive and majority owner of Continental Resources, warned this week that the “law of unintended consequences” often kicked in when oil prices fell. There are already signs that the market is starting to self-correct. US shale companies are drilling less, meaning that their production growth will slow, and American drivers are rushing back to gas-guzzling cars. The longer oil stays at its present level, though, the more likely it is that those unintended consequences will emerge.
(c) 2014 The Financial Times Limited
