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How to be wise with our oil savings

By Esmond Birnie

Published 16/02/2016

America's oil sector has been hit hard
America's oil sector has been hit hard

According to the International Energy Agency, the world is awash with oil. But, at a time when a litre of petrol costs under a quid and 900 litres of home heating under £250, you could be forgiven for telling Russia, Saudi Arabia and the rest of the oil producing countries to keep on pumping.

At current prices, the world's oil producers are making a cash loss on every barrel sold - and even where they're not, such as in the Middle East, government budgets are in tatters, so what's with the generosity?

The answer to that is a combination of supply, demand and a dose of good old geopolitics.

On the supply side, Saudi Arabia is pumping full-tilt, possibly to destabilise the fast-growing US shale oil industry, probably to undermine arch-rival Iran, now back in the market since the lifting of nuclear sanctions and, possibly, to poke Russia in the eye for its support of the government side in the Syrian civil war. In any case, Saudi Arabia is in the fortunate position, not shared by all the members of the Organisation for Petroleum Exporting Countries (Opec), of sitting on top of almost limitless reserves of oil.

As supply has expanded very substantially, demand growth has slowed down. Economic growth in the eurozone remains modest, there has been volatility in Japan and most significantly, the Chinese economy is decelerating and that's really slowing the demand for oil. Put the two together and you have to ask, just how low could oil prices go?

Well, one well-respected bank has suggested that we could be looking at oil plummeting to £10 a barrel and, according to the RAC, that would equate to petrol at around 86p a litre, a whopping 45p/litre saving on average pump prices in June 2014. If your tank holds 50 litres, that's a £22.50 saving every time you refill - around £280 a year if you drive 5,000 miles annually.

Factor in the fall in heating oil and domestic gas, the resulting decline in road-haulage and transport costs and the impact of that on the cost of goods and services, and consumers may indeed say, "keep on pumping".

But, like everything in economics, it's not that simple. Low oil prices, coupled with sluggish economic activity, impact on stock markets, business confidence and, indirectly, on consumers.

Another way oil prices impact on consumers is through pensions. According to a Sky investigation, Shell accounts for £1 in every £6 received in dividends by UK pension funds and Shell shares fell by 36% in 12 months. On that basis, the fortunes of oil companies are more important than we might think. In addition, low fuel prices encourage people to drive more, even to change their car more often. Although new car sales in Northern Ireland fell 2.6%, overall sales of new cars in the UK in January 2016 were up almost 3% as compared with January 2015, with the industry shifting more new metal in the first month than it has for 11 years.

In the USA, vehicle sales hit a new record in 2015, surpassing the previous record set in 2000, while cheap petrol has hit demand for fuel efficient cars, electric vehicles experiencing a 40% year-on-year sales decline in 2015. That's not good for the environment and, as governments are no longer incentivised to support and subsidise renewable energy, our green credentials may take a bashing too.

Then there are the risks to US shale-oil extraction, where US shale drillers have debts of about $200bn. If producers go to the wall, the write-off could be catastrophic to banks and investors.

Analysts warn prices could be approaching an inflection point for the US economy, where many oil producers could be at risk of default. Danske Bank has said crude price declines are a "risk to the US economy", as low prices put pressure on the oil sector.

Bankruptcies in America's oil sector in the second half of 2015 exceeded those during the financial crisis, said Bank of America, while low prices have resulted in a huge reduction in investment.

If certain oil fields now shut down it is possible that supply could suddenly be restricted and the price would swing up rapidly, particularly if accompanied by a rise in Chinese economic output. On balance, I don't think it will happen and this is echoed by Vitol, the world's largest oil trader; it says that even with an economic recovery, the price of oil could be capped at $60 a barrel for decade.

Make the most of low oil prices, but maybe, if you can, use some of the savings to top up your pension.

Next week, Economy Watch hears from Neil Gibson of the Northern Ireland Economic Policy Centre, Ulster University

Belfast Telegraph

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