A temporary windfall for consumers

Oil prices

 

Consumers will welcome the sustained sharp fall in the oil price in recent months which has seen a litre of petrol drop from €1.70 less than four years ago to some €1.25 today. The benefit of a lower oil prices operates like a tax cut, leaving those who spend less on oil with more to spend on other goods and services. The global oil glut continues to increase and shows few signs of shrinking soon.

The International Energy Agency (IEA) estimates that it will be next year before supply and demand start to balance. But how much further the oil price – at close to $30 a barrel – may fall, and how quickly, remains uncertain. Much may depend on the impact that Iran’s renewed oil production has on overall global supply and price, following the lifting of international sanctions.

Lower oil prices have provided a temporary stimulus to world growth involving a transfer of wealth from producers to consumers. This has left oil producing countries with less to spend on imports because of their reduced oil revenues. That, and the contraction in China’s economy, have increasingly served as a drag on global growth. For governments too, lower energy prices have also meant lower tax revenues. Since 2008, successive Irish governments have raised tax on fuel five times. The current glut in global oil, with prices continuing to fall, has meant there is little incentive for investment in oil exploration or production. Consequently, as that excess supply reduces, oil prices could rebound quickly and rise rapidly, thereby boosting inflation and weakening growth.

The current glut in oil supply, although welcome to consumers, is not unqualified good news. Low oil prices have made it harder to reduce carbon emissions at the time when global leaders have committed themselves to that goal. Energy conservation measures and the development of cleaner alternatives to fossil fuels have become less financially compelling options. Nevertheless, the financial benefits of cheaper oil should be seen by consumers as a temporary windfall gain rather than a permanent change.

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