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Posted: 27/08/2016

Impact of the Oil price plunge on the British economy

Impact of the Oil price plunge on the British economy

The oil price plunge of the last 18 months has been spectacular, dropping from a peak of $115 (£80) in the summer of 2014 to under $30 a barrel now. Whilst we appear to have reached a short term period of stability, the massive decline, and the potential for further drops, has had, and will continue to have, a massive impact on the global and British economy.

The principle cause of the decline is an increase in supply as US fracking massively increases global production, just as the demand from China, Brazil, and the growth economies of pacific rim, run out of steam.

This over supply, coupled with deceased demand shows no sign of ending. The lifting of sanctions on Iran (January 2016), will enable the country to become a major exporter within months, and a slug of fresh supply compounds the oversupply problem, which could send the price even lower, with the possibility of $10 per barrel being discussed.

How has the oil price plunge affected the British economy and what does the low oil price mean for Britain’s North Sea production, the British people, their pensions, and the renewable energy sector.

The British North Sea has been devastated by the dive in the oil price. It is estimated that over 15% of the total UK oil and gas industry workforce, over 65,000 jobs, have been lost in the past 18 months. The North Sea is considered economic at $60 per barrel so with oil currently less than half that more job losses are forecast as the oil production and exploration companies abandon projects that are no longer considered economic.

Globally the oil industry has cut projects worth more than $380bn worldwide, and many UK based oil companies, and their employees work abroad and did earn from these global projects. Already this year, 2016, BP announced 4000 more jobs would be cut globally, with 600 of those falling in Aberdeen, so this will take a further toll on the Scottish economy which is heavily reliant on oil, and on all British oil sector workers who sell their skills outside the UK.

Whilst one part of the British economy suffers, as a whole the economy is considered to benefit from the major cost reductions brought about by lower oil prices. Fuel from transportation is cheaper for cars, lorries, planes, and ships, and domestic heating oil users have seen prices fall by nearly 2/3rds. It was estimated that the average UK household had £300 more to spend at Christmas because of the fall in petrol and diesel road fuel prices during 2015 which saw both being sold at less than £1 per litre before the year was out. It is anticipated that the decrease in the price of wholesale gas will be passed on to domestic users in the near future. 

Transportation and energy costs are two of the biggest for many households and businesses, and the reduction in the cost of those and of oil derived products, such as plastics and chemicals, means that whilst one part of the economy suffers, the vast majority benefit both personally, and commercially, from falling oil, and oil related costs.

Unfortunately whilst businesses are enjoying a reduction in costs, especially those heavily reliant on oil as a raw material or energy source, the stock market, and the pension funds, are going through turbulent times. Oil companies, and businesses operating within the oil industry, were traditionally seen as stable investments that paid out large dividends to shareholders. Many pension funds are heavily invested in the sector and historically enjoyed the benefits of that investment. BP’s dividends, for example, are so big that they have traditionally accounted for £1 in every £6 of the total shareholder payouts made by the country’s 100 biggest companies. BP’s shares have fallen 35 per cent, whilst Shell’s are down by 45 per cent since the summer of 2014. The reality is that pension investments have suffered as the oil price has slipped and the dividends have shrunk.

The oil companies are not the only energy industry that has suffered. Britain’s green energy sector, which had already had its solar power and onshore wind subsidies cut, was becoming less attractive every day the oil price fell. As an industry it was struggling to stand on its own two feet without subsidy, but banked on the continual rise in oil to make wind, solar, and hydro electricity power generation a competitive alternative. The acute decline in prices has made fossil fuels a more attractive electricity source for power stations even after the costs of cleaning up the traditional energy production processes are taken into account.

So the oil price falls to date have had a significant impact on the British economy, energy and oil companies, businesses, pensioners, people and householders, and government through tax receipts. The direction of the oil price is a topic of hot debate as it how long low prices can last, but very few have not been affected by the global oversupply of oil and the reduction in demand.