oil price fall should be welcomed

The Bank of England left interest rates where they are to no great surprise, with inflation remaining below target and continued global uncertainties. The rally from last night soon faded as economic and geopolitical concern continued to weigh on markets. The US market took a further turn for the worse as Mario Draghi, in a speech at the Brooking Institute, once again dampened speculation that the ECB are on the point of initiating a program of buying government bonds.

 

The weakness in the oil price continues, as does the speculation for the reasons.  The recent strength in the US dollar has had some of the blame, recently the dollar has lost some ground and still the oil price falls further.

 

The FT featured an article a year ago by Ed Morse one of Citi’s leading commodity analysts highlighting how shale gas will “virtually guarantee” the end of oil as a monopoly as a transport fuel paving the way for lower crude prices. A spike in the oil price has been responsible over the years for several recessions, the one of the early 70’s the most famous. Eight out of 10 post World War 2 recessions were followed by an oil price shock. Global economies are struggling to grow, as we know, had this been accompanied by a spiking oil price it would have become almost impossible.

 

The lower oil price reduces inflationary pressures currently helping to allow central banks to keep interest rates at these current historic lows. On top of that it lowers the input costs of many industries. The lower oil price should not be feared but welcomed. 

Posted on October 9, 2014 .