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Oil plunge a panacea for much of world economy

 
Published Nov. 29, 2014

A renewed plunge in oil prices is a worrying sign of weakness in the global economy that could shake governments dependent on oil revenues. Yet it is also a bonus for consumers as prices fall at the pump, giving individuals more spending money and lowering costs for many businesses.

The latest slide follows OPEC's decision to leave its production target at 30 million barrels a day. Member nations of the cartel are worried they'll lose market share if they lower production.

Partly because of the shale oil boom in the United States, the world is awash in oil at a time when demand from major economies is weak — so prices are falling. Citibank analysts wrote in a report Thursday that global supplies exceed demand by about 700,000 barrels a day now.

Brent crude, an international benchmark, was at $72.50 a barrel on Friday, down nearly 30 percent in the past three months and at its lowest in four years. U.S. crude oil tumbled 10 percent Friday to settle at $66.15 a barrel and is down 38 percent since hitting $107 in June.

Tom Kloza, chief oil analyst at the Oil Price Information Service, expects the price to fall $5 or $10 more a barrel before stopping. "It's that kind of rout," he said.

Overall, the slide is a boon for consumers in oil-importing regions like Asia, Europe and North America. But there are also some possible negatives.

The U.S. economy will receive an outsized benefit from lower oil prices because the United States is the world's largest oil consumer.

U.S. consumers have been surprised and delighted at the lowest gasoline prices since 2010. The U.S. national average was $2.79 on Friday. Kloza expects gas to eventually be a full $1 per gallon below its June peak of about $3.70 a gallon. That would save typical households $60 a month for those that burn 60 gallons of fuel.

In Florida, the average price Friday was $2.785, down from $3.459 a year ago, according to AAA. In the Tampa Bay area, the average Friday was $2.687, down from $3.436 a year ago.

The oil companies propelling a production boom in Canada and the United States won't be so happy. Crude produced in Canadian oil sands, deep offshore in the Gulf of Mexico and in some U.S. onshore shale formations is some of the most expensive oil to produce in the world.

Drillers will have to cut back at least some activity. Forcing this kind of slowdown may have been part of OPEC's motivation for declining to cut its own production.

Many of Europe's economies are net importers of oil, so lower prices are likely to give a welcome, if small, boost to growth. Cheaper energy reduces costs for industry and puts more money in consumers' pockets. That will be particularly useful in the 18-nation eurozone, where unemployment is high.

Russia gets about 50 percent of its state revenue from oil exports, so the government's concerns are clear. The national economy is already sliding into recession under the impact of Western sanctions and investors are pulling money out.

In Japan, which is a net importer of oil, cheaper crude prices have been slow to filter down to consumers. Also, a recent drop in the yen's value will reduce the savings Japan can reap from lower oil prices.

Meanwhile, the Chinese government adjusts retail prices in line with the global market. As a result, Beijing has cut prices repeatedly this year. Elsewhere in Asia, the impact is varied. In Indonesia, fuel costs have risen because the government has cut subsidies, more than offsetting the decline in global oil prices. Malaysia is among the few oil-exporting nations in Asia, so the drop is hurting its coffers. But it is also cutting expensive fuel subsidies.