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Here are some forecasts from respected people for the direction of oil prices from the not too distant past: In 2008, analysts from investment bank Goldman Sachs said crude oil prices could hit $US200 per barrel in the “not too distant future”. That never happened. (In fact, just a few months after this prediction, the global financial system imploded, sending the world economy into its worst recession since the Great Depression, and the oil price tumbling with that). This time last year, famed economist Jim O’Neill, the man who coined the term BRICS (Brazil, Russia, India, China) said ” all the indications are that [the oil price] will rebound this year” and oil prices “are likely to finish the year higher than where they began.” That didn’t happen either. The oil price fell more than 30 per cent last year. In March last year, not a single economist surveyed by the Wall Street Journal saw oil prices below $US50 per barrel in 2016. Wrong as well.
Overnight, crude oil prices sank below $US30 per barrel, their lowest level since late 2003. And now people are saying they could fall further, to as low as $US10 per barrel, according to one bank (Standard Chartered).
Since very few people can say, hand on heart, they predicted oil’s current slump, predictions like this should probably be taken with a grain of salt.
Forecasting asset prices is difficult enough, and economists have a notoriously terrible track record at that. But the convoluted geopolitics and opaque dynamics of the oil market are on another level altogether. Let’s face it, nobody really knows what the hell is going on.
Few predicted the impact of the US shale oil revolution would be so significant; even fewer saw that OPEC, the cartel that dominates the oil market, would respond by actually increasing production. And that this would come into play just as the Chinese economy began to seriously wobble.
A lower oil price is in theory, great news for consumers. But before you get too excited, remember that the current weakness reflects weak global growth. And it doesn’t seem to have delivered as much of a boost to the biggest developed economies as in the past.
Interesting chart.Suggests the boost to G7 growth from lower oil prices is yet to come. Note the contrast v 2008-09 pic.twitter南京夜网/D9LZ7OOYAY— Shane Oliver (@ShaneOliverAMP) January 12, 2016
It’s a similar story here in Australia.
Lower crude oil prices typically translate into lower fuel prices for drivers. And that has been happening. They are also good news for airlines such as Qantas, but don’t necessarily translate into cheaper airline tickets.
But they are terrible for Australia’s energy sector (a big driver of investment spending in the country). Shares in beleaguered oil and gas company Santos, for example, are trading at their lowest level in two decades.
On balance, weaker oil prices “have a positive effect on overall growth of the Australian economy,” the RBA said last year. They could even leave room for the RBA to cut interest rates later this year (which at least one big bank thinks might happen).
The problem is, given the hilariously bad forecasts of the past, nobody really knows how long the slump will last. And so the blindfold rollercoaster ride continues.
This story Administrator ready to work first appeared on Nanjing Night Net.