A sharp drop in the price of oil is sending ripples through the global economy, lending more spending power to consumers — particularly for Americans’ big holiday shopping spree — but potentially dampening investment in U.S. oil production.

While the fall doesn’t yet match the 2014-2016 slump to $26 per barrel, it is already having an impact. The international crude benchmark, Brent, has fallen under $65 per barrel from a four-year high in early October over $86, and U.S. crude has dropped below $55 a barrel.

Retailers in the U.S., who depend on heavy Christmas spending, should see a boost as lower gas prices give consumers more spending power. But falling investment in new rigs in oil-producing U.S. states could offset the overall impact on economic growth.

“The key point to remember here is that lower oil prices are now a net drag on the U.S. economy. This is a huge break from the past,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Shepherdson said the oil price drop wasn’t a major threat to the U.S. economy but would make a difference in growth “at the margins” as the U.S. slows once the boost from recent tax cuts fades.

It’s different this time for Russia, too. Analysts say the major oil and gas producer is more insulated from a market drop because it has found ways to balance the state budget at lower oil prices than before. That’s one reason Russia has been pumping oil at top speed recently.

The International Energy Agency says abundant global oil supplies should be welcomed as insurance against market volatility. It says lower prices are also a big break for people in developing countries who have seen fuel prices rise due to a stronger U.S. dollar. Oil is priced in dollars.

The recent drop in oil has been driven by calls for major producers to increase production. The U.S., Saudi Arabia, and Russia have all stepped up output. One reason was fears of a price spike due to sanctions on Iran. But when U.S. President Donald Trump imposed them Nov. 5, he added a six-month waiver for several countries that are major consumers of Iranian oil. Instead of spiking, prices have slumped. Concerns about slowing global growth have also weighed on prices.

More volatility could lie ahead. The IEA has warned that despite the temporary waivers, the U.S. still intends to block Iran’s ability to export oil. Meanwhile OPEC, the cartel of oil-producing countries, could respond by announcing production cuts at its Dec. 6 meeting in Vienna. Analysts at Commerzbank said that “a production cut of at least 1 million barrels a day will probably be agreed there.”

“We see the oil market as being in a phase of exaggeration and expect a noticeable price recovery after the OPEC meeting at the latest.”

Source: The Associated Press

Sign up to receive our latest news!

By submitting this form, I agree to the terms.