Just how low can oil prices go? The oil price has weakened consistently since OPEC scrapped production ceilings at its meeting earlier this month. With a glut of oil on the market and lacklustre growth in many developed economies, the basic economics of supply and demand have sent prices lower, with Brent Crude around $36 at lunchtime today, within a whisker of the $36.20 low reached in 2008 as the financial crisis broke. It has subsequently recovered some ground to close to $38 in early evening trading on Monday, but it was the most volatile and nervous day seen for some time. Look back a few months, when the oil price was over $50 a barrel, and you can see the extent of what has happened.
The speed of the fall, which accelerated early on Monday as markets started to focus on Iranian production returning next year as an embargo is lifted, has taken markets by surprise. It is a cost saving to oil importing countries, such as Ireland. However in a world where central banks are trying to fight the threat of deflation, falling oil prices are a factor holding inflation down at a time when the policy goal is to get the overall level of price inflation back to some kind of normality. They also reflect, in part, some uncertainty about the path of world growth.
Lower oil costs - and their knock on to petrol and diesel prices - have been a key factor holding down the overall level of price inflation in Ireland. The latest figures showed a significant fall in overall consumer prices in November, meaning average prices were 0.2 per cent lower than a year earlier. People getting wage increases this year should thus be seeing a real boost to their spending power, though of course this will depend on where they spend their cash.
Presuming the oil price drop of recente weeks is sustained it should lead to prices continuing to ease at the pumps, even if recent euro weakness against the dollar - the currency in which oil is denominated - has worked in the opposite direction for much of this year. The latest AA survey of national prices shows an average cost of 131.2 cent for a litre of unleaded petrol in November. down from almost 145 cent over the summer. However online monitors of prices show that in many places fuel is now available for 125 cent a litre, or lower.
Lower oil costs benefit Ireland, as an oil importer. They are part of the reason why we now have the extraordinary mix of economic growth running at 7 per cent and no inflation. Volatility will remain in the market, but with such a big glut in supply it is hard to see oil prices heading sharply higher in the short term.
