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Falling oil prices not just a economic blessing

Published on 1st Feb, Edition 5, 2016


Pakistan uses more than dollar 15 billion for very nearly 35 percent of its imports on oil. Trade deficit have the negative effect on the economy. The Economic Monitoring Committee and State Bank of Pakistan have completely failed to decrease import volume of the country. In 2014, total commodity imports were $41.69 billion against exports of $25.15 billion, meaning a trade deficit in commodities of $16.64 billion compared with oil imports of $14.72 billion. Pakistan has started losing money and revenue that had come down particularly from the import of oil.

The Oil and Gas Regulatory Authority (OGRA) is planning to cut petroleum prices by Rs8-10 from first February this year following continuous declining crude oil prices in the international market, especially in Saudi Arabia where the crude oil price stood below $22 per barrel. Petrol and diesel were being sold at Rs40.39 and Rs26.21 per liter respectively in January 2005 when the prices of crude oil were around $60-65. If the Pakistan government reduces petrol price by Rs8-10 from February 1, the petrol price will stand at Rs67-68 per liter. The actual price should be around Rs40-50 if the Arab crude oil price was below $25 per barrel, the analyst claimed. An analyst in Pakistan says that oil prices of the petroleum products had been on the decline due to world’s oversupply from the Organization of Petroleum Exporting Countries (OPEC).

The Government of Pakistan raised taxes to meet its budgetary targets. One of the reasons for higher petrol price in Pakistan is because of higher devaluation of Pakistan currencies against the US dollar. Benchmark Arab Light Crude has dropped by 52.77 per cent to $27 per barrel now from $55 in January 2015, but the government reduced petrol and diesel prices by 3 percent and 6 percent, respectively, in the last one year.

The oil bills constitute the largest item in the import list of Pakistan. They disturb the balance of payments. Rising oil prices over the past few years have lessened Pakistan’s foreign reserves. They are also impacting the price of the rupee, which has been declining against the dollar.

Incomprehensible economic advantage

Now, if all goes well a fall in the oil price will reduce the import bills of Pakistan, thereby improving the balance of payments, foreign reserves and the value of the rupee. This price fall will reduce the cost of inputs, which will be reflected in the prices of final products. Any reduction in the cost of production means a reduction of inflation in the country.

Low oil prices have depressed the stock market. Cheaper gasoline and heating oil are giving consumers some hope for more money so that they can use to step up spending later.

This is a plus point for consumers as the deep savings being accumulated from sharply lower energy prices. The price of oil reached a 12-year low of $28.15 a barrel by the end of trading last week. As recently as June, the price was about $60. Retail gasoline prices have sunk to a national average of $1.86 a gallon, the lowest since 2009, according to AAA.

The economic advantage that many economic experts expect to result from cheaper oil and gas is not understandable. Oil prices began falling in mid-2014 but have so far failed to deliver the boost to US growth that economists had anticipated.

Widespread layoffs and spending cuts by oil drillers have counterbalance some of the breakthrough from steady consumer spending. Many Americans have saved, rather than spent. At some point, continued savings from cheaper energy could fuel more accelerated investment and spending.

Global stock prices have plummeted. Many stock investors fear that cheaper oil reflects a worldwide economic slump that has weakened demand, particularly in developing markets like China and Brazil.

It more likely, that developed economies will benefit from energy savings and remain healthy. Oil and gas prices have fallen for about 18 months. The persistence of the price declines will likely to put confidence on consumers that cheaper gas is here to stay and encourage more spending. Lower oil prices will bolster Europe’s fragile recovery.


Layoffs, cut in operation

Energy drilling companies, scaled back their operations in 2015. They will likely have to cut back further this year. Last year, the US mining sector, which includes oil and gas, shed 130,000 jobs. Houston-based Southwestern Energy said that it would slash 1,100 jobs from a staff of about 2,780. And Regions Bank, based in Birmingham, Alabama, said it would cut 260 jobs in the first three months of this year. The bank recently wrote off a large chunk of its loans to energy companies.

Americans saved 5.5 percent of their incomes in November, up nearly a full percentage point from a year earlier. Overall, consumer spending likely rose just 2.6 percent last year, according to Jesse Edgerton, an economist at JPMorgan. That’s below the 3.6 percent increase he expected. Still, spending might have been ever lower without cheaper gas, he notes.

For now, there are already some signs of cheaper oil’s benefits. Delta Air Lines told investors this week that bookings for this spring are ahead of last year’s pace because cheaper gasoline means consumers have more money.

Other airlines, including United Continental and Southwest Airlines, have reported big profit increases, due to savings from cheaper fuel.

The global economy is going into recession once again, but this time it is being driven by falling oil prices. It is slowing output growth, widening credit spreads, declining corporate earnings, falling inflation expectations, receding capital investment and rising inventories.

Currently the US is importing about 5.1 million barrels a day more than they were exporting of crude oil and petroleum products. At $100 a barrel, that had been a net drain on the US economy of $190 billion each year. That drain will now be cut by more than half by falling oil prices.

“The price itself is irrational,” said Khalid al-Falih, chairman of state-owned oil firm Saudi Aramco, at the World Economic Forum in the Swiss ski resort of Davos, recently.

Impact in Singapore

Singapore’s consumer prices fell the most in almost three decades last year amid very low oil prices, dismal economic growth and the soft housing rental market.

The Monetary Authority of Singapore to maintain its Singapore dollar policy instead of acting to slow the currency’s appreciation — barring a major shock or signs of recession. This was its 14th straight month of contraction and Singapore’s longest stretch of negative inflation since the global financial crisis. It brought inflation for all of last year to negative 0.5 percent — the first full-year negative inflation reading here since 2002, and the lowest in 29 years, noted DBS economist Irvin Seah.

All not good for all countries

The fall in oil prices does not mean that all countries stand to gain. The losers would include Venezuela, Iran and Russia. The last two countries are already facing economic sanctions that are hurting their economies. This may not apply to Saudi Arabia and other Gulf countries. Being major oil exporters, the fall in oil prices will not affect their economies much as prices at $70 a barrel are still profitable for these countries. Their cost of extracting oil is much lower.

Also, the fall in oil prices will discourage investment in shale gas whose cost of extraction is around $45 a barrel. So, OPEC countries will bear temporary losses in terms of lower revenues for the short-term to discourage heavy investments in shale gas and other non-oil energy resources.

Once shale gas production stops to be profitable (oil prices below $70 a barrel means no attraction for non-oil energy sources), the Gulf countries can increase oil prices in the future. May be oil importing countries will be the winners.


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