Decoding the fall in Global Oil Prices

Cheaper oil is good for the global economy; for an energy-intensive economy such as India’s, which also depends on imported oil for meeting four-fifths of its needs, a fall in oil price is desired.
Yet, the biggest fall in the stock market in five-and-a-half years last week was triggered by crude oil piercing the $50 a barrel mark on its unrelenting downward journey. The fall was also due to fears such as Greece exiting the euro zone and slowdown in China.
A recent IMF study says that every $10 fall in oil price adds 0.2 percentage points to global GDP growth. And that should mean a boost of a over 1.2 percentage points to global GDP growth given that oil has dropped from around $115 a barrel six months ago to less than $50 a barrel now.


Reasons for fall in oil prices:

• Lower global demand is the main reason.
  
• The inability, or unwillingness rather, of the Organisation of Petroleum Exporting Countries (OPEC), which accounts for about 40 per cent of global oil output, to cut production to match the demand is a major factor.
  
• Saudi Arabia, which dominates the cartel with the highest share, appears determined to stay in a race to the bottom along with U.S. shale oil producers.
  
• The oil market was funded in a major way in the last few years by cheap dollars flowing out of the Federal Reserve’s quantitative easing programme. With interest rates at near zero, surplus funds flowed into the commodity markets, notably crude oil, driving their prices upwards.
  

Cheaper fuel prices will put more money in the hands of consumers which will, in turn, be either invested or spent elsewhere. And this would drive economic growth.