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The oil companies are struggling – but what do lower oil prices mean for us?

Friday 12th February 2016

Written by Martin Upton

One major factor driving turbulence on the world’s stock exchanges has been the fall in oil prices over the past year. 
Since mid-2014 the benchmark oil price, Brent Crude, has plummeted from $110 a barrel to $34. 
Oversupply by the oil producing nations and the slowdown in global economic activity create the perfect ‘demand versus supply’ conditions to fuel further downward pressure in oil prices. Some expect the price of oil to fall to as low as $10 a barrel.
This is clearly bad news for the oil companies. On 2nd February BP announced underlying profits for 2015 of $5.9 billion – down 51% from $12.1 billion in 2014. 
The news was taken badly – initially at least – by the stock market, with BP’s share price marked down by a further 6%. This was despite BP announcing that the dividend of 10 cents per share would be retained. 
With its results BP also announced plans for 7,000 job cuts over the next two years and a cut to its capital spending programme. BP’s poor results come within days of the announcement by Chevron, the US oil company, of its first quarterly loss for 13 years. 
Shell’s latest results are imminent – but the company has already warned that its results will be bad, with profits expected to fall significantly. 
Those with not-too-long memories will recall the havoc wreaked to economies when oil prices surged in the 1970s and then again in the 2000s. 
So aside from their employees and the shareholders in oil companies, lower oil prices must be surely be viewed as good news? Yes, lower crude oil prices will result in downward pressure on the price we pay for petrol when filling up our cars – but don’t forget the other key factors that determine petrol prices are tax and refinement and distribution costs. 
So the fall in crude oil prices will not necessarily be matched by a fall in prices at the pumps. However lower oil prices will help to keep travel costs, including air fares, down and will also help to contain the price of gas and electricity. Since oil is a key ingredient in the production of many goods, like plastics, the lower price will help to sustain the minute levels of price inflation we have witnessed over the past year. It has been argued that the overall effect of lower oil prices – if sustained at current levels – will be a 1% increase in economic growth and, with that, 90,000 additional jobs in economy by 2020.
Against this good news is the reality that, if lower oil prices help to contain price inflation, then interest rates are unlikely to rise much, if at all, in the foreseeable future. 
Additionally, given their size, shares in oil companies make up a key component of the assets of pension funds. So one way or another the news on oil prices is bad news for savers and those investing in pension funds.
All-in-all the impact of oil prices on household finances is mixed – we can expect to pay less for petrol and other items where oil is a key ingredient, but there are adverse effects for those saving for the future.
*Martin Upton is Director of the True Potential Centre for the Public Understanding of Finance (True Potential PUFin)

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