LONDON — Oil prices slumped to multi-year lows on Tuesday after Saudi Arabia discounted supplies to the U.S., a move that is shaking an already volatile market but will likely give the world economy an unexpected stimulus.
The 25 percent or so slide in oil prices since the summer could boost consumer spending and business investment in many economies around the world as fuel bills fall.
But not everyone’s a winner. Oil producing countries like Russia and Venezuela, which have high extraction costs and whose budgets rely on assumptions of relatively high energy prices, stand to lose out.
The benchmark New York contract dropped another 3.2 percent Tuesday to $76.22, its lowest level since October 2011. It was trading at $100 a barrel as recently as July. Brent, the international benchmark, declined 2.5 percent, to $82.69, having earlier fallen to $82.08, its lowest level in just over four years.
Adam Slater, senior economist at Oxford Economics, reckons the recent fall in oil prices, if sustained, could add around 0.4 percent to GDP in the U.S. in two years, and a little less in Europe. China, which is the second-largest oil consumer and on track to become the largest net importer of oil, could see GDP 0.8 percent higher than it otherwise would have been.
“This is similar to a surprise stimulus,” said Slater.
Lower oil prices wouldn’t necessarily be a welcome sign if they were due mainly to weak demand, as occurred in 2008 in the wake of the collapse of Lehman Brothers. The shock to confidence stoked by that bankruptcy led to the world’s deepest economic recession since World War II, pushing the benchmark New York rate to around $35 a barrel from over $140 in the space of a few months.
Though a drop in demand is a factor in the current slump amid concerns over growth in Europe and China, Slater says supply-side factors are having a much bigger impact than in 2008. The rise of fracking in the U.S., the return of oil output from Iraq and Libya and Saudi Arabia’s willingness to resist production cuts have combined to weigh on prices.
On Monday, Saudi Arabia, OPEC’s largest oil producer, cut prices for customers in the U.S. The move has been interpreted as an attempt by the country to maintain its market share in the world’s largest economy against imports from the likes of Canada, Mexico and Venezuela and U.S. shale oil producers.
Oxford Economics’ Slater reckons that Saudi Arabia’s intent could also be to squeeze out high cost producers over time, in the knowledge that it can withstand lower oil prices for longer.
Russia and Venezuela are two countries that are considered particularly vulnerable to a sustained fall in prices as their economies are highly dependent on oil. And because their costs of production are high and baseline budget plans are considered optimistic, analysts say they stand to lose more than, say, the Gulf states.
Lower tax revenue from the fall in prices could derail public finances, potentially prompting government spending cuts or tax increases that can hurt growth.
“The wealthier Gulf states should be able to weather a period of lower oil prices, but prospects are bleaker for countries such as Venezuela and Russia whose governments were less prudent when oil prices were high,” said Andrew Kenningham, senior global economist at Capital Economics.
OPEC members are due to meet on Nov. 27 in Vienna, Austria, but investors doubt the cartel will be able to agree to any reduction in production quotas given Saudi Arabia’s actions. That is another reason why oil prices have remained under pressure and why many analysts think this oil price retreat may be longer-lasting than a previous bout of weakness seen in 2012.
“This time, the fall should stick a little bit more,” said Slater.