Oil Prices Are Lower. Is it Bad News?

A few months ago no one would expect the price of oil to collapse. In fact, during the last three months the price of oil lost more than half of its value and is now trading below $70 dollars per barrel. So what is behind this sudden change and what it means for the world’s economy?

To some extent, the slowdown in the global economy is causing deterioration in the demand for oil. For instance, gasoline consumption has declined significantly in past six months and China, the world largest oil consumer, has reported the weakest GDP growth in five years. In addition, since the U.S. dollar is the benchmark fore crude prices, oil prices are falling in sympathy to an appreciation of U.S. currency. In fact, during the last month, the U.S. dollar appreciated significantly against the euro, reaching $1.28 for the first time since November 2006. However, lower oil prices are not necessarily bad news for the world economy since lower energy prices could mean lower inflation going forward. Price stability could open the door for more aggressive interest rates cuts and this could help the world economy to soften the financial crisis.

Anna Fedec, contact@tradingeconomics.com
10/22/2008 7:13:08 PM