With fuel prices widely expected to drop below £1 a litre before the end of the year consumers might well feel that Christmas has come early this year – but what effect will low oil prices have on Scotland’s economy? By Deputy Business Editor Mark Latham
2015 was supposed to be the year that oil prices recovered after last year’s crash which saw Brent crude falling to less than $65 barrel. But last week oil prices slumped to a six-year low of less than $40 a barrel in what has become one of the longest price routs in the industry's history.
There’s no obvious end in sight, either, with leading oil producers now preparing for the possibility of prices halving to $20 a barrel after financial market turmoil which last week saw iron ore sinking to its lowest price in a decade and heavy losses on global stock markets.
The fall in the price of oil has been driven by an economic slowdown in China, the world’s second largest economy, and a glut in oil created by the availability of new oil supplies from North America.
But the trigger to the most recent downturn in prices was this month’s meeting of OPEC members where, despite over supply and record high oil stocks around the globe, Saudi Arabia – the world’s second largest oil producer – declined to back down from its strategy of using low oil prices to maintain market share and knock out US shale producers.
The fall in petrol and diesel will be a huge boost for household budgets because, as well as cutting the cost of driving, it is also expected to feed through to lower prices across the high street as distribution costs for retailers shrink.
The oil price slump also means that the Bank of England is now more likely to delay any interest rate increase, which is good news for anyone with a mortgage or debts, but not so good for savers.
The global economy is also expected to be a winner with the International Monetary Fund estimating that every $10 fall in oil prices will increase world economic output by 0.2 per cent. In developed countries, where growth remains mostly anaemic, such a boost could be crucial.
But there will be losers as well, internationally as well as domestically.
Oil-dependent economies such as Russia, Saudi Arabia and Nigeria will be hit hard, while the heavily oil reliant economy of the east coast of Scotland – from Aberdeen to Shetland – will also be effected by the slump which last week prompted an industry expert to warn of the “nightmare before Christmas”.
KPMG’s head of oil and gas Mark Andrews said that some UK companies are now running out of options other than shutting down oil fields earlier than planned or selling assets off at low valuations.
Andrews added that companies with cash flow constraints or large debts “are concluding that weathering the storm of low prices may not be possible for the length of time now forecast”.
Wood Group, the multinational Aberdeen-based oil services giant, on Thursday blamed the low oil price for a further round of jobs cuts that will see 1,000 posts culled from its UK North Sea operations.
Oil and gas firms in the UK are estimated to have shed around 5,500 jobs in the first half of this year from the 65,000 employed in the sector this time last year. But the impact is also being felt right across the supply chain.
But, while jobs have been lost, falling oil prices have not stopped investment going into the North Sea and the Northern Atlantic waters west of Shetland over the last year.
Just last week London-based Independent Oil and Gas committed to pressing ahead with the planned Skipper appraisal well, which lies some 200 miles east of Orkney.
With an estimated breakeven price of about $34 a barrel, the project is expected to be economically viable in spite of low current crude prices but could face difficulties if oil prices continue to fall.
Despite the warnings of financial Armageddon, Scotland’s offshore sector (which accounts for 4 per cent of the country’s economy) has in the past weathered prolonged periods of low oil prices without imploding: for most of the 1990s the price of Brent hovered around just $20 a barrel.
Although oil prices are low now, they are actually closer to the historical average of $41.81 of the last 33 years than the unusually high prices of 2011 to mid-2014, when the price was consistently above $100 a barrel.
Some industry experts believe that the falling oil price could in the long-term be good for Scotland’s offshore oil and gas industry, which has over the last decade developed a reputation as one of the highest costs regions in the world.
The oil price slump of the last 18 months has forced local companies to cut their costs and, so long as oil prices eventually recover, this could lead to the region becoming more competitive and efficient.
PETROL BELOW A POUND A LITRE BY CHRISTMAS?
The falling price of oil and supermarket competition for customers has led the RAC to predict that British drivers should on average be paying less than £1 a litre by Christmas if retailers "do the right thing" and pass on savings from the lower oil price.
The expected forecourt price war could save motorists across the UK an average of £17 a week or £884 a year compared to peak petrol prices in 2012 when petrol reached 137.3p. Motorists in Scotland would likely save more as prices are higher north of the border.
However, the Petrol Retailers Association has warned that it is sceptical that prices will fall much lower saying that “it is the UK wholesale price in pence per litre that drives pump pricing and there is no direct linear relationship to changes in Brent crude oil prices.”
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