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Lower oil – good for some, not for everyone

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

  • The crude oil price decline is not as dramatic as the Bitcoin price collapse. Unlike Bitcoin, the price of crude oil matters to the world economy. A lower oil price shifts money from oil producers to oil consumers. The oil price may rise again. For now, lower oil prices are good and bad news.
  • Oil consumers like lower oil prices. Cheaper oil gives consumers more cash to spend after fueling their cars. Because people buy fuel regularly, they notice the price of it. A price increase makes people angry (as French protests show). A fuel price drop makes people happier than the savings justify. However, cars do not run on crude oil. Oil processing costs money. There are oil taxes, too. This means consumer fuel prices have fallen less than crude oil prices. Consumers benefit, but less than crude oil price changes imply.
  • Oil producers are selling less oil in cash terms. Thus they have less cash to spend. Past periods of lower oil prices led OPEC countries to sell assets. Oil producers tend to save in dollars, but spend in euros. If low oil prices cause oil producers to sell assets to support spending, the net flow is out of dollars and into euros.