Falling Oil Prices Is Good For The World Economy

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Written By Hasan Rezazadeh

Oil companies are having a tough time shedding thousands of jobs and slashing spending as the price per barrel plunges.

But it’s hard for consumers to sympathise for businesses that have enjoyed huge profits.

In a report for the Organisation of Economic Co-operation and Development (OECD), Netherlands ambassador Noe van Hulst suggests the feeling that somehow plunging oil prices have a different meaning for the world economy this time round is misplaced.

A drop in oil prices tends to bolster consumer confidence by giving them more to spend as energy bills shrink.

This money feeds through to retailers and manufacturers as demand improves for goods and services, which in turn is reflected as growth in the economy.

Consumers are winners not losers

“This time the industry is saying the effect of the slump in oil prices is having a deeper effect on the oil business and oil producing companies,” said Hulst.

“It’s difficult to see how consumers cannot benefit from falling energy prices and what we are seeing is the losers are shouting louder than the winners.”

For example, oil companies in the North Sea are campaigning for a cut in taxes to help them through the slump, which some Middle East producers expect to last for a decade or more.

“The reason the slump looks different this time is that it’s taking longer for lower oil prices to filter through to the general economy to show their impact on growth,” said Hulst.

Unforeseen consequences of global warming

“This has always happened when oil prices have fallen in the past and it’s difficult to see something different happening this time around.”

Hulst also explained falling oil prices do not affect global GDP too much because the main exporters, such as Saudi Arabia, Russia and the United Arab Emirates, have huge cash reserves to plaster over the holes in their budgets.

“The key question is how long prices will stay low,” he said. “The main producers can afford to sit out low prices for some years, but not forever.”

Hulst also pointed out an adverse consequence of cheaper oil is consumers use more energy and generate more greenhouse gases.

International Energy Agency Oil Market Report