Cheaper oil may be last best stimulus

August 10, 2011

By Christopher Swann and Ian Campbell
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Falling crude prices are the silver lining to the market’s black clouds. While governments lack economic ammo, one estimate says each cent off gas adds $1 billion to U.S. pockets alone. OPEC is unlikely to intervene any time soon, meaning lower fuel costs could be the only economic booster for now.

Oil prices can be a potent stabilizer in volatile times — dampening consumer spending power in a boom and buoying incomes when times are tough. The contribution could be especially valuable now. Not only do the authorities in most nations lack an ability to provide further stimulus, many will be actively sapping demand through fiscal retrenchment.

The effect is particularly strong in the United States. If sustained, the fall in gas prices on the NYMEX exchange from the $3.46 a gallon at the end of April to $2.70 now will provide a $75 billion boost to the U.S. economy, according to Deutsche Bank.

Elsewhere, politicians will also be glad of the relief from exorbitant crude. Soaring commodities have pushed up prices around the world, especially in fast-growing emerging economies. Chinese inflation is up 6.5 percent. The likes of Brazil and India have raised interest rates steeply to rein in prices. Their growth has been affected.

If investor gloom over demand proves justified, oil could decline further. There will be the requisite mumbling of discontent from OPEC, which has already trimmed its outlook for how much oil the world desires. And the cartel, which controls about 40 percent of global production, will be tempted to cut output to stop prices falling too far.

Before that happens, though, oil has more room to fall. Even after extra government spending to placate public opposition, oil kingpin Saudi Arabia can balance its budget with Brent at $80-85 a barrel, Deutsche Bank reckons. In addition, OPEC has not always been successful setting a floor. Cutting 4.2 million barrels of production a day a few years ago amid the financial crisis, for example, failed to tame oil.

With growth in rich nations so sluggish, oil at $80 would still be too high for comfort. But politicians and consumers will nevertheless be grateful for small mercies.

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