Lower fuel prices; Xmas present with a bite

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Early Christmas cheer today as the RAC announced that petrol prices are to fall below £1 at the pump this Christmas. But although likely to put a smile on consumers faces, could the reason for this petrol price drop, falling oil prices, mean that this Christmas present could be an unwanted gift into 2016.

An excellent article from Reuters here highlights how falling oil prices are likely to be the biggest financial risk of 2016. The familiar litany of damage – or rather carnage- that the drop in oil prices has caused to the global economy is quite staggering. More than a trillion dollars of market capitalization has been wiped off oil stocks worldwide since the beginning of oil’s drop from a high of $115 dollars a barrel in June 2014.

About 2 trillion euros of European government debt is now yielding less than zero percent after oil-seeded deflation scares forced the inflation-targeting European Central Bank to begin a bond-buying spree earlier in 2015.

The scale of oil’s plunge has hit oil exporting nations hard. In countries such as Brazil, Russia as well as in Africa and South East Asia, currencies have imploded. In fact 2015 will be the first year of a net private capital outflow from emerging markets since 1988.

This slump in oil prices is unlikely to go anytime soon. From the disarray last week at OPEC’s meeting with no agreement on supply or production caps; to Iran putting more oil on the market following a lift of sanctions, prices are likely to fall further. This has led to Goldman Sachs predicting US crude (oil) could shed almost 50 percent from here to $20. Such a scenario would have massive implications for the global markets and economy, likely putting us further into economic slowdown and potential continuing UK deflation.

Seemingly all bad news then. But can there be a silver lining? Well the British Chambers of commerce have reduced the economic forecast for the UK over the next 3 years, in part because of this falling oil price causing a gloomier global economic outlook. GDP growth is down this year from 2.6% to 2.4%. For next year it expects to see growth of 2.5%, down from 2.7% and for 2017 a rate of 2.5%, down from 2.7%. But crucially, the Chambers re-emphasised the importance of moving the UK economy away from consumer debt. Around 8.8 million UK citizens are over-indebted. With interest rates so low, now may be the best time in years for people to pay off mortgages and debts. Whether this happens though remains to be seen.

So enjoy the cheaper pump prices this Christmas. But be aware that it comes with a likely bite!

 

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About the Author

About the Author: Crispin Oyen-Williams is the Director and Founder of Business Innovate. .

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