Falling Oil Prices Will Continue to Impact Global Economy in 2015

As oil prices continue to hover around $66 a barrel, the impacts are having far more effects on the global economy. Global crude prices have dropped from a high of around $115 per barrel just this past June. Countries which consume the most oil will benefit the most from lower transportation and manufacturing costs while oil producing countries continue to struggle with lower revenues.

The International Energy Agency recently lowered its 2015 growth forecast by another 230,000 barrels a day, reaching around 900,000 barrels for the year. This is the fifth time they have cut its growth demand forecast within the last six months. With OPEC's recent decision not to cut oil production to boost prices, there will continue to be an oversupply of oil through much of the year. OPEC has stated that it will not cut production even if prices fall to $40 per gallon. In the long term, they believe US oil production is unsustainable and production will drop off after 2020. The US Energy Department has reduced its production increase forecast in the US to 300,000 gallons per day versus its previous forecast of 400,000.

The US Energy Department has slashed its prediction for the average price of gasoline by another 35 cents per gallon for 2015. Nationally, prices are 61 cents lower than this time last year at an average of $2.66 per gallon. While consumers will reap some of the benefits of lower gas prices for air and truck freight, trucking companies project higher rates in 2015 as the freight tonnage they are moving continues to increase. 

European fuel prices have not benefited from lower global oil prices as much as the US. Most European countries have seen a modest decrease in fuel prices, although there are a handful of countries including the Czech Republic, Ireland, Greece and Norway have higher average gas prices than at the start of 2014.

Airlines worldwide will benefit from the lower fuel costs, resulting in lower costs for consumers. The actual timing of the savings will vary due to the fact that airlines pre-purchase fuel at prices set for 6-12 month periods, so for many the savings won’t arrive until later in the year. However, not all of the fuel savings will be passed along as airlines plan to use some of the additional profits to upgrade their fleets to more fuel efficient planes. Cargo volumes for air freight are projected to increase by 4.5% in 2015 to approximately 53.5 million tons, so it won’t be just passengers who will benefit from the reduced fuel prices. As port congestion continues to plague ocean shipments around the world, reduced fuel costs for the airlines could help mitigate the additional costs of air shipments and divert volume to ease the bottlenecks.

Overall, lower oil prices in 2015 will benefit consumers and businesses by reducing manufacturing and transportation costs, although the savings will vary regionally. North America will see the biggest savings for consumers, truckload shipments, and air exports as the domestic production of oil continues to increase. Profitability for truckload and air freight providers will increase, helping stabilize providers and allowing for investment in the future through the reinvestment of savings into more fuel efficient fleets. This will help control costs as oil prices will inevitably rise again in the future.

Contributor: Joseph Boncek III

Articles Cited

• American Trucking Associations Forecast
• U.A.E. Sees OPEC Output Unchanged Even If Oil Drops to $40, (Bloomberg.com), auth. Anthony DiPaola and Mahmoud Habboush, pub 12/15/14
• World Oil Demand Outlook Cut Again; Sub-$60 Price Seen Holding, (Bloomberg.com), auth. Grant Smith and Mark Shenk, pub 12/12/14
• The AA Fuel Price Report, (www.aa.com), pub 12/1/14
• Airline Profitability Improves with Falling Oil Prices, (iata.org), Press release pub 12/10/14
•  US Energy Information Administration Short-term Energy Outlook, pub 12/9/14