What plummeting oil prices mean for you

If you ever went looking for evidence to prove that economists, analysts, journalists and so-called expert commentators haven’t a clue what they are talking about much of the time, you would not have to go much further than a quick glance at oil production and prices over recent years.

For many years up until the very recent past, there was much talk of Peak Oil and what would happen to our world when fossil fuels dried up. Then technology stepped in, production methods got better and oil started to emerge from the ground in places where it had previously been inaccessible. Suddenly all the talk was of a glut in supply and Peak Oil became a less hot topic of conversation – but it’s likely to return. At least for now. This glut in supply is either good news or very bad news, depending on which side of the environmental and economic fence you are sitting and how forward-looking you’d like to be.

In the early summer of 2008, as a barrel of crude oil reached $147 (€136) on international markets, much talk was of what would happen when a barrel hit $200. Before it could get close to that, Lehman Brothers came crashing down, taking the global economy with it. The economic shockwaves sent oil prices into a tailspin, which is starting to look like a death spiral.

Global oversupply and worries about the severity of the economic slowdown in China and the sluggish performance of normally high-consuming countries in the developed world are to blame for prices not seen since 2003. In the middle of last week, crude oil prices continued on their downward trajectory, having fallen almost 20 per cent since the beginning of the year. And prices at the beginning of the year were very low.

Analysts have been scrambling to make sense of it all and were forced to frantically adjust to the new year price rout. "A marked deterioration in oil market fundamentals in early 2016 has persuaded us to make some large downward adjustments to our oil price forecasts for 2016," Barclays bank stated. "We now expect [a barrel of oil] to average $37 in 2016, down from our previous forecasts of $60 and $56, respectively."

That is a fairly major “downward adjustment” but Standard Chartered went further – much further, in fact. That bank’s experts said prices could drop as low as $10 a barrel.

“Given that no fundamental relationship is currently driving the oil market towards any equilibrium, prices are being moved almost entirely by financial flows caused by fluctuations in other asset prices, including the [US dollar] and equity markets,” its analysts said. “We think prices could fall as low as $10 before most of the money managers in the market conceded that matters had gone too far.”

But what does that mean for consumers in Ireland? If oil prices continue to fall, will we be winners or losers? Here are just some of the ways it has an impact.

1 The easiest-to-identify, real-time way oil prices affect us is on garage forecourts. Petrol and diesel prices have fallen significantly in recent months, although not perhaps by as much as many people would like. According to the fuel-tracking website pumps.ie, the average price of a litre of petrol in the Republic last week was €1.25, with many garages selling a litre for less than €1.20. Two years ago, according to the AA, the average price of a litre of petrol in the State was €1.53, and the price was €1.70 in September 2012.

What kind of savings are we talking about? Well, fuel usage figures from the AA suggest that an average car does about 19,000km a year. If it has a fuel consumption rate of 9.5 litres per 100km, it will use 150 litres of fuel per month or 1,800 litres a year. Based on these numbers, the average Irish motorist will spend €810 less on fuel this year than they would have four years ago.

2 If people are spending that much less on forecourts, they have a lot more money to spend elsewhere. This increased spending power boosts the wider economy and might go some way to explaining a 7 per cent increase in spending in the run-up to Christmas compared with last year. There are about two million private cars on the road, and if all of them made savings of about €800, that would see a net transfer of wealth back to Irish consumers of more than €1.5 billion over the next 12 months.

3 And the transfer and the savings might be even greater than that were it not for taxes and currency values. Oil is bought in US dollars, and Irish prices are dependent on the relative strength of the euro against the dollar. In recent times the news hasn't been good. When oil prices fall, investors put money into safe havens such as the dollar, which has caused that currency to get stronger in recent months. The euro has lost about 20 per cent of its value against the dollar in the past 18 months, which has kept petrol prices higher than they might have been.

Fuel taxes have also done consumers no favours. Since the emergency budget of October 2008, there have been five tax increases on fuel. Together these have added about 20 cent to a litre of petrol. The excise duty of fuel is levied on a per-litre basis and not as a percentage of the price, which means that when the cost falls, the tax remains at the same level. VAT is charged at 23 per cent of the non-tax fuel price and does fall in line with other price falls. The vagaries of the tax system mean about 91 cent of every litre of petrol is taken up by tax, with the remaining 30 cent or so going towards everything else.

4 While forecourt prices might be on the frontline, the most profound impact of cheap oil prices is on the economy as a whole. No matter what the Government says, lower oil prices have contributed to our economic recovery and growth of 7 per cent in a period of historically low inflation. Ireland is an oil importer, and lower prices cut costs for consumers and businesses. However, falling oil prices could bring about deflation across Europe, which could have a serious long-term impact on growth.

5 Home energy prices have been falling over recent months, although price declines have been slower in this sphere than on forecourts. All the companies have rolled out price cuts in recent months and have been very anxious that we know all about it. But average gas and electricity bills have fallen by no more than €50 a year. That amounts to a decline of around 5 per cent, which is pretty meagre when you consider the actual falls in the cost of the raw materials.

Earlier this year, the Minister for Energy, Alex White, held a series of meetings with the energy suppliers to discuss the speed at which wholesale energy price reductions were being reflected in household bills. Not much changed after that. To be fair to White, prices are deregulated and there's not much more he can do other than ask the question.

6 Falling oil prices have downsides. It might mean we have more money, but cheaper oil also means there are fewer incentives to develop cleaner alternatives to fossil fuels. In the 1970s oil prices spiked, which brought about massive economic disruption in developed countries, most notably the US. In turn that led to huge amounts of research into ways to save energy. Fast-forward 10 years and some of that research and development started to pay off. Cars and electricity generation became more efficient. And everyone benefited. If oil prices stay low, there is less incentive to develop cheap alternatives, which stymies research, and that will have knock-on effects that will be felt for a generation.

7 When oil prices are low, gas- guzzling SUVs sell well, whereas fuel-efficient smaller cars do not. Cheap oil makes it much harder to curb carbon emissions.

8 There might, however, be some environmental pluses. One of the reasons why there has been a surge in supply on global markets has been a dramatic ramping-up of production of shale oil in the US. This method of oil extraction is not only controversial, it's also expensive. To make it profitable, such producers need oil to sell at more than $60 a barrel. When it sells for a lot less, this production method becomes much less attractive. There is a downside here, too. When incentives to develop new oil and gasfields disappear, there will be an inevitable reduction in R&D, which will lead to higher costs once oil prices rebound.

9 From managing dairy and poultry production to ploughing fields, agriculture is very energy-intensive. Lower oil prices benefit farmers, and ultimately that benefit gets passed on to all consumers in the form of cheaper food, at least once the middlemen in big retail have taken their cut.

10 There should be a drop in the cost of flights, although that has yet to happen in any meaningful way. One argument put forward by advocates of the aviation industry to explain why consumers have not seen any price cuts is that airlines buy their fuel far in advance, which leads to a significant time lapse in savings. However, the drop in oil prices has been sustained for more than a year, so that argument suggests that airlines all over the world are making more money than they otherwise might and are not passing on anything to consumers. Internationally, demand for airline seats is strong, so they are unlikely to start cutting fares, even though they could.