Oil Price Decline: Economic Impact and Market Dynamics

The Impact of Declining Oil Prices on the Global Economy

The most relevant issue in recent economic news is the spectacular decline in petroleum prices over the past several months, with its economic value falling by 46% since last June.

Nowadays, petroleum is considered the most important energy source, leading many countries to base their economies on petroleum and its byproducts. Therefore, it is widely known as 'black gold'.

Global Demand and Price Fluctuations

In July 2014, the International Energy Agency (IEA) predicted that worldwide demand would increase by 1.4 million barrels per day (bpd) in 2015. However, these projections were revised three months later. Demand growth was lower than expected due to slower global economic growth and the elevated prospect of further price declines.

Causes of the Oil Price Reduction

After briefly analyzing price evolution, we will now discuss the primary causes and significant effects of this price reduction.

• Excessive Supply vs. Low Demand

  The primary cause of this deflationary effect is the excessive supply of petroleum relative to existing low demand. This imbalance between supply and demand, coupled with the continued high production levels by oil-producing countries, led to the collapse of petroleum prices.

• Political Conflicts and Production Levels

  Secondly, ongoing political conflicts among oil-producing nations, particularly regarding production levels and price maintenance, also play a significant role.

Effects of the Oil Price Reduction

Two significant effects of this price reduction, stemming from the aforementioned causes, are:

• Negative Impact on Exporter Economies

  First, the decrease in petroleum prices has a negative impact on the economies of oil-exporting countries, significantly affecting their revenue and economic stability, especially for those heavily reliant on oil exports.

• Deflationary Pressure and the Eurozone

  Secondly, the fall in energy prices contributes to a decline in inflation. This poses a significant risk, particularly in the Eurozone, where there is already a high risk of deflation.

The Consumer Conundrum: Fuel Prices at the Pump

In conclusion, a common question among consumers when hearing about declining oil prices is: Why don't fuel prices at the pump decrease proportionally?

The answer is complex: petrol stations often blame high government taxes, while governments accuse petrol stations of not passing on the savings to consumers. Ultimately, consumers are caught in the middle, often failing to see the benefits of falling crude oil prices at the pump.