Oil plunge is threat and boon to global economies

A renewed plunge in oil prices – following OPEC’s decision to leave its production target unchanged – is a boon for consumers but a worrying sign in the global economy that could shake governments dependent on oil revenue.

Partly because of the shale oil boom in the U.S., the world is awash in oil at a time when demand from major economies is weak – so prices are falling. Citibank analysts wrote in a report Thursday that global supplies exceed demand by about 700,000 barrels a day now.

Tom Kloza, chief oil analyst at the Oil Price Information Service, expects the price to fall by another $5 or $10 a barrel before stopping.

The U.S. economy will receive an outsized benefit from lower oil prices because the U.S. is the world’s largest oil consumer.

The oil companies propelling a production boom in Canada and the U.S. won’t be so happy. Crude produced in Canadian oil sands, deep offshore in the Gulf of Mexico and in some U.S. onshore shale formations is some of the most expensive oil to produce in the world.

Drillers will have to cut back at least some activity. Forcing this kind of slowdown may have been part of OPEC’s motivation for declining to cut its own production.

Many of Europe’s economies are net importers of oil, so lower prices are likely to give a welcome, if small, boost to growth. Cheaper energy reduces costs for industry and puts more money in consumers’ pockets. That will be particularly useful in the 18-nation eurozone, where unemployment is high.

Declining fuel prices also, however, add to one of the eurozone’s biggest headaches: low inflation, which makes it harder for troubled economies like Greece to reduce debt.

The few European producing countries – mainly Britain and Norway in the North Sea – face a drop in revenues that could balance out the positives of cheaper fuel.

Russia gets about 50 percent of its state revenue from oil exports, so the government’s concerns are clear. The economy is already sliding into recession under the impact of sanctions and investors are pulling money out.

Venezuela pushed for an OPEC cut because it badly needs high oil prices to fund its government. The country’s oil production has been steadily declining for years so the combination of lower output and lower prices is already squeezing the nation’s finances.

The Chinese government adjusts retail prices in line with the global market. As a result, Beijing has cut prices repeatedly this year. Cheaper fuel would ease pressure on manufacturers and small businesses. China’s growth has declined steadily over the past two years.

Elsewhere in Asia, the impact is varied. In Indonesia, fuel costs have risen because the government has cut subsidies, more than offsetting the decline in global oil prices. The higher prices triggered street protests, so the fall in crude prices may help ease tensions.

Malaysia is among the few oil-exporting nations in Asia, so the drop is hurting its coffers. But it is also cutting expensive fuel subsidies.