Crude Price Drop Will Have Major Implications for the World Economy

The most significant event to take place in a long while is the dramatic decline in the price of crude oil. West Texas Intermediate or WTI is currently quoted at around $76 per barrel and Brent is close to $80 per barrel. The fact that Saudi Arabia has slashed its base price by 40 US cents implies that prices will stay at their current low for some time to come and therefore while it may be that the price of oil will go up a bit from here, the chances are good that it will bounce around the $75 per barrel level for WTI for a while.

There are other factors supporting a lower oil price in the short to medium term:

  • Global economic growth remains weak and is generally expected to remain weak, which will be a damper on crude prices.
  • The US is set to continue to produce more than enough crude for domestic use, so it will be a net exporter of both gas and oil,

Based on these factors, world prices of energy commodities should remain at current levels or move still lower.

The impact of low crude prices will be significant on many countries. 

Losers are likely to be:

  • Iran: where the low price of oil may even push them closer to the negotiating table over their nuclear ambitions.
  • Venezuela: where lower oil revenues will cause their already precarious economic situation to just get worse.
  • Mexico: which just started opening up its petroleum industry to foreign companies, may find its efforts to secure external (or internal) investment difficult at this time.
  • Russia: Squeezed by low prizes, Russia may have little choice but to deliver gas to the EU and to Ukraine. Russia needs the cash as its economy is faltering. Consequently, the lower oil price just might help in reducing the level of tensions between Russia and the West.

The winners are likely to be:

  • Europe, China, India and Japan: where lower prices should help external account positions.  It will also put more cash in consumers pockets, and lower production and distribution costs which could provide a boost in the short-term and help lift sluggish growth forecasts.

The extent to which significantly lower crude prices affect the various economies remains to be seen.  but, as stated above, this is a big deal with political, economic and investment implications.