The US price for a barrel of crude has fallen to less than $78 a barrel, the lowest level in years. That comes hard on the heels of a summer-long 25% dip in prices that pushed gas at the pump below $3 a gallon – the lowest level since 2010.
It’s not a real crash: the world doesn’t really need more oil. Much of the drop is Saudi Arabia’s latest pricing shenanigans in negotiating with Opec.
A crash in oil prices looks dire for the economy. But this may make less difference than you might imagine to your day-to-day finances. So how exactly may it affect you?
Heating oil prices
If you pay lower heating bills this winter, it will probably be more to do with the weather than with fuel costs.
Anyone who relies on heating oil or other refined oil products to heat their home might feel grateful at the idea of spending less this winter. But although you will make savings as the price per litre of home heating oil is less, a prolonged cold snap this will still likely to leave you gazing at your heating bill in dismay. In order to help offset the costs of a cold Winter it is always recommended to buy your heating oil early as costs rise as demand rises over the Winter months.
Refined from crude oil, the price at the pump tends to move in sync with oil. There are regional variables – is there enough refining capacity? What was the price of wholesale petrol at the time of purchase – that can alter those dynamics, and there’s usually a lag before crude oil price declines start showing up at the pump.
Cheaper petrol could relieve some of the pressure on our beleaguered household incomes, just in time for the Christmas. And anything that spells relief on the cost front for those who have struggled throughout the “recovery” would be welcome news, indeed. The retailers wouldn’t mind a bit, either, given their problems making money from the cash-strapped masses.
The crash of oil prices won’t make air travel all that much cheaper.
Air travel probably isn’t going to get much cheaper. Yes, just as you pay less for petrol, airlines will pay less for jet fuel – their single largest operating cost. Just don’t expect them to pass those savings on to you in the form of last-minute deals or cheaper-than-expected winter getaways. On the contrary: American Airlines said the amount passengers paid to fly each mile in its third quarter rose, as fuel costs fell. The industry, after years of financial misery, has consolidated, and it looks to be keeping itself on an even footing rather than sharing the wealth. Only time will tell if they change course.
Your gold jewelry is worth less
One reason that gold prices rise is that people worry about inflation and turn to gold instead, believing that the precious metal is more likely to hold its real value when the price/value relationship of other assets breaks down completely. What’s the link to oil prices? Economists see a cause and effect relationship between the two: when oil prices rise, it suggests that the economy is heating up, and that increases the risk of inflation. The reverse also is true: sure enough, gold is hovering at its lowest levels in four years.
Food prices won’t necessarily fall
Generally speaking lower crude oil prices mean lower prices for agricultural products, and indeed, food prices have been falling globally this year. But the relationship isn’t a linear one, with food prices falling at the same rate that oil does – there are just too many other factors at work. And when you buy a box of corn flakes, you buy far more than corn: you’re paying for the packaging, the marketing, the distribution and the retailing. It’s unlikely you’ll pay less for those corn flakes because crude oil and corn are cheaper. And certainly not 20% less.
Farmers won’t necessarily benefit
Even if you see slightly lower food prices, many farmers won’t be better off, especially this year. Most of them bought or contracted to buy their season’s supply of diesel fuel, pesticides and fertilizer – all petroleum-based products – before the rout in oil prices began early in the summer. To the extent that farmers failed to commit to sell their crops, some farmers could end up in the worst of all possible worlds: stuck with costs that were higher than they might have been while earning prices for their crops that are 15% to 20% lower, thanks to the crude oil sell off.
It’s too soon to tell whether the current crude oil price movements are more than one of those dramatic swings that characterize global commodity markets.
After members of Opec, of which Saudi Arabia is the dominant member, meet in Vienna on 27th November, we should have a little more insight into whether their battle for market share will provide reasons – and not just the emotion of negotiation – to fuel further selling.
But what any oil price decline means to you depends a lot more on where and how you live than those blaring headlines suggest.
Oil prices could well keep falling – and at the very least, they’re likely to remain extremely volatile. But you’ll fare better if you view it as an interesting phenomenon that may prove beneficial to you in some ways, rather than the end of the world.