The Pros and Cons of Low Oil Prices

Low Oil Prices

The global oil prices have dropped dramatically over the past year, causing exporting nations to suffer financially and importing nations to benefit from cheap fuel and heating. From a somewhat stable $110 per barrel between 2010 and 2014, the price for crude oil currently stands at $48 per barrel, more than a 50% decrease in just 12 months. This significant drop means different things to different nations, with weak economies in some countries and increased production in others the cause for such substantial change. But what are the positives and negatives of low oil prices and what does it mean for the global market?

Many believe that in the UK the low price for oil will have a detrimental effect on the low carbon energy industry. It is likely that if using oil remains a cheap option to fill your car or heat your home then people will lean in that direction, and away from reduced emission alternatives. For consumers it is welcome relief though, especially for failing economies in Europe. It is estimated that a 10% drop in oil prices is the equivalent of a 0.1% increase in economic output, providing a short term lift if nothing more. It is likely that governments who have committed to reducing their output will need to stand firm on plans to decarbonise, with the urge to learn towards the cheaper option something that will be very tempting indeed.

Low oil prices will also have an impact on natural gas prices too, with gas export contracts generally linked to oil and likely to be unaffected by fluctuations in the market. For the UK it could be a good opportunity to stock up and take advantage of the low natural gas prices that have come about due to the low oil price, importing more for use in transport and power generation. Some would argue that gas is a more substantial competitor to renewable energy sources anyway, though this makes the drop in the price of oil more of an inadvertent attack on the decarbonising sector.

For exporters such as Russia, oil and gas account for 70% of their export income, making a drop in dollar per barrel prices worth a loss of billions. Should oil prices fail to recover it could cause irreparable damage to the Russian economy. Much of the problem comes down to western sanctions too, as a result of Russia’s support for Ukrainian separatists, but the falling prices have also played their part. The other side of the coin has seen the USA take huge measures to increase their oil production, the highest seen in 30 years. The somewhat controversial ‘fracking’ method has been at the forefront of the USA’s boom, meaning less reliance on unstable sectors such as the Middle East and Russia.

So whilst consumers may benefit, renewable energy is likely to suffer. Russia may feel the strain, but the USA is powering forward with its new found love for shale. Should the price of oil continue to drop, or at least remain low, then there will certainly be cause to both celebrate and commiserate. Time will tell how low oil prices can actually go, and what the outcome will mean for nations across the globe.