A plunging oil price: implications and expectations

Energy resources Business Mineral industries Australia
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Not everyone is going to be better off at the back end of the current oil price cycle.


The fall in oil prices in the second half of 2014 was both dramatic and unexpected, bringing to an end a four-year period of relative stability. As recently as October 2014, the World Bank forecast crude oil to average US$96/bbl in 2015.1 As at 19 January 2015, crude oil was trading around $49/bbl. This is the lowest pricing point since April 2009, at the height of the global financial crisis.

So what’s driving the oil price plunge? In short, a cocktail of supply, demand and geopolitical conditions have created a surplus of crude oil internationally which has driven down the price.

Isn’t a fall in oil prices meant to be good news? The effect of the oil price plunge varies between economies, individual sectors, businesses and households. Generally though, if you’re consuming more than you’re producing you’ll be better off.

On this premise, not everyone is going to be better off at the back end of this price cycle. The implications of this economic event will be both complex and far reaching. For producers of oil and gas, including Australian firms Santos and Woodside, it could be a critical moment. For the average Australian manufacturer with big energy needs, it will be a reprieve, as it will be for most Australian households.

Regardless of who wins or loses, the rapid and sustained fall in the oil price is shaping up to be 2015's biggest economic story.

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