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All you wanted to know about falling oil prices...

Filed on January 22, 2016 | Last updated on January 22, 2016 at 09.31 am
All you wanted to know about falling oil prices...


(AFP)


(AP)

Global stocks are having their worst start to a year in recent history and it has a lot to do with oil prices. So, who is responsible?


If you woke up one morning this past week and read headlines like: "FTSE 100 enters bear market after 50 billion wiped off value of UK's biggest companies", or "Global stocks routed again as oil slide seems bottomless" or "Global stocks routed again as oil slide seems bottomless", and scratched your head thinking, 'what on earth is going on?', then you may want to read on.

Global stocks are having their worst start to a year in recent history and it has a lot to do with oil prices. Since the late-2008 high of $147.2 per barrel, Brent Crude has dropped to $27.61 per barrel - a whopping 81 per cent of its value in less than a decade.

Who is responsible?

One word: China. Even though demand for crude has been growing steadily, analysts fear that the economic growth in China is slowing down and they are the second biggest consumer of oil after the US. The other reason is all the excess oil that is in the global market thanks to increased production in the US, over-production in Saudi Arabia, new players like Iran and cheap oil from Russia. If you remember your supply and demand lessons from school, you will remember that an excess in supply brings down the prices. Now, that would mean things should get cheaper right - definitely the next time you fill up your car's fuel tank? Well, yes and no.

Why is it affecting other markets?

All you wanted to know about falling oil prices... (KT4836121.JPG)

The fall in oil prices is great for consumers: it reduces costs and leaves them with more to spend on their products, and, it's great for motorists, airlines and other businesses that rely heavily on fuel, meaning air travel, cars and even cosmetics are cheaper. But why is this drop in oil price affecting the stock markets?

For starters, it's all the jobs the oil industry creates. Now that the prices are falling the world's biggest oil companies are slashing jobs and backing off major investments as the price of crude falls to new lows. Also, two of the biggest oil companies in the world, Exxon and Chevron, are part of the 30-member Dow Jones industrial average, and, of the 20 biggest share price losers in the S&P 500 this year, 13 are energy companies. So if those big companies' share prices drop, they take all the other indices with them too, like FTSE from that headline up there, wiping out billions of dollars worth of stock value.

How does this affect other markets?

This, of course, has an adverse effect on all those affected companies as well, which results in other major problems like unemployment. Just imagine that you have a company that supplies special parts to an oil producing company. With less revenues, those oil companies will need less of your parts, which in turn affects your revenues, which cascade down to your suppliers and workers. This cascading effect is what has the global markets on tenterhooks. If the oil prices don't stabilise, it could result in far more serious complications down the line, affecting countries' economic growth and prosperity.

Could this cause further crises, like the 2008 crash?

The energy market is not nearly as big as the housing market, but a lot of industries are dependent on oil prices. If oil prices continue to stay low, the oil companies and the industries connected to them might struggle to pay off their loans and investors, which could trigger other market problems. Thankfully, the UAE is already moving away from an oil-based economy and investing in future energy projects like solar and nuclear power.

Is there a stable price for oil that helps everyone?

"It seems ironic that in the run-up to the global financial crisis we were worried about oil prices being too high in 2007 and 2008. Now we're worried about them being too low," said Julian Jessop, head of commodities research with London-based researchers Capital Economics Ltd, in an interview with AP. According to him, $60 per barrel is a good price - "[It is] high enough to keep the main producers in business but low enough to provide a real boost to the incomes of consumers."

rohit@khaleejtimes.com





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