Some prices are notoriously hard to forecast. The crude oil price is one of them. Nobody trying to forecast the oil price a year ago foresaw a collapse to below $US30 a barrel. In fact many at that time were expecting the oil price to recover from what was then regarded as an unsustainably low price of around $US46 a barrel to around $US65 a barrel by the end of 2015 and that would have still been well below prices of $US100 a barrel and more seen as recently as mid-2014.
The story of the sharply falling oil price, especially since mid-2015 has not been so much about weak demand growth for oil, although that has played some part with global growth still relatively soft, but has been mostly about burgeoning supply. One big surprise in 2015 has been the effective collapse of OPEC as any sort of restraining force constraining growth in global oil supply. OPEC’s biggest oil producer by far, Saudi Arabia, decided to no longer restrain its oil production for a number of reasons including long-standing frustration with other OPEC members cheating on production quotas; increasing budget problems in Saudi Arabia and the need for more revenue; and a desire to take on the competitive threat of burgeoning production from the fast rising US shale oil industry.
Now global oil production is running on some estimates as much as 2 million barrels a day above global demand, a potent force placing even more downward pressure on oil prices. At some point lower oil prices start to hurt those producers with highest costs – some US shale oil producers in particular – causing supply to fall and oil prices to stabilize and possibly rise. Reduction in oil supply could happen more drastically in the event of sudden disruption to production by key oil producers, say for example and heaven forbid that it should happen, if the worsening political relationship between Saudi Arabia deteriorates to open warfare.
Rather the opposite of the drastic oil supply cut scenario seems in prospect at present. Iran announced at the weekend that with the lifting of international economic sanctions it hopes in the near future to lift its oil exports by 500,000 barrels a day. Also as our Prime Minister indicated at the weekend the war against Islamic State in Iraq is slowly being won. Iraqi forces at some point are likely to liberate parts of their country from Islamic State potentially pumping more Iraqi oil in time in to the global market.
The cards seem stacked towards the oil price staying low, if not even lower, for a little time yet, but always with the proviso that surprise influences dog oil price forecasts like no other. But what of the economic impact if oil prices stay low?
Until recently, oil price falls were regarded as a net positive influence on global economic growth over time. Net oil importing nations of which there are many, see falling energy costs as a boon almost equivalent in effect to a tax cut for businesses and households alike. Big oil exporting countries are net losers often. Big energy importers, however, far outweigh big energy exporters so the net effect on global spending and growth is positive.