At the time of this column’s writing, the price of a barrel of Brent crude oil — the international benchmark for the commodity’s global price — stands at $79.74. This price point is down from a high of approximately $127 in 2011. Common intuition would suggest that lower prices would be a universal benefit, but the reality of the price drop is more complex. There are some clear winners and losers, so let’s start with those.
The global economy, taken in aggregate, is the clearest winner. The Economist estimates that about a 10 percent change in oil price leads to a correspondingly inverse 0.2 percent change in world GDP. The savings effect functions slightly differently depending on whether the fall in price is due to supply or demand, but this slump is due to both, and thus will benefit the global economy.
The proliferation of energy efficient vehicles, equipment, and building and farming practices has reduced the developed world’s usage of fossil fuels. Concurrently, increasing oil production in the United States coupled with Saudi Arabia’s recent announcement that it will not reduce production means that there is a relative glut. While it may not make much sense in the short term for Saudi Arabia to keep producing in the face of falling prices, it’s actually a particularly strategic long-term game. As the world’s biggest oil producer with strong currency and commodity reserves from years of saving, it can afford this dip and by pushing it further, can attempt to take market share from other countries that are not as large or do not have as much stability and cannot sustain falling prices, like Iraq and Russia.
Other winners include the average consumer in the developed world. As oil prices drop, transport costs, agricultural costs and building costs all drop as well, meaning there is a clear effect on the prices consumers pay. On the whole, in addition to any industry that uses fossil fuels, most oil importers stand to gain. For example, China is estimated to save $2.1 billion for every $1 drop in the price of oil. India, too, is positioned to receive significant benefits from the price drop. Oil is the largest Indian import, but its exports are diversified to such an extent that its economy will be largely insulated from a price drop. The government will be able to reduce expenditures on subsidies for farming and energy, thus liberalizing the market for those two industries.
In terms of losers, there are quite a few — with the potential for even more. First, there are the obvious losers: the oil producing countries that have mismanaged their historical revenue. Venezuela holds a significant amount of debt, and in order to maintain a budget surplus and stay solvent, they need to maintain an oil price of at least $120, according to a Deutsche Bank estimate. Iran, in a similar position, is even more exposed to oil market risk because of the political sanctions levied against it by Western nations. Without access to reliable capital markets to buy government or private debt, it finds itself in a much more cash-strapped position than any of its oil-producing neighbors to the West. Finally, the price slump hits Russia and its consumers at a particularly inopportune moment. Already experiencing a price drop caused by Western sanctions, the falling price of oil could cause a gradual slowdown in its economy. Russian inflation stands at 8 percent, meaning that Russia is at risk for stagflation as growth slows.
With all the talk of how the price change in oil is affecting governments and economies — fairly large and abstract terms — how does the price of oil affect the average Georgetown student?
To begin, anyone with a car on campus will get to keep a few more dollars in his or her wallet at the pump. The savings at the pump are not uniform across the country, so Washington, D.C., may still have a markedly higher average price than, say, New Jersey, but savings will still be noticeable. Joe Hoya can also expect relatively steady prices on his weekly trip to Safeway. Fuel-cost savings mean that food distributors can hold their prices steady or even decrease them, in sharp contrast to the post-crisis era when prices shot up dramatically in correlation with oil prices. Finally, if any Hoyas hold stock in major oil producers or related companies, they will have seen the negative effect of the price drop in their portfolio. Royal Dutch Shell has fallen to $68.89 from a summer high of $83.12, while BP’s shares are trading at $41.18, a drop from their summer high of $53.38 — a roughly 23 percent drop in value.
So, while the expression goes, “A rising tide lifts all ships,” a falling one in this case is a bit more complicated.