Global Economic Effects of Plummeting Oil prices: UK inflation slows; Russia faces economic turmoil


December 2014

Global Economic Effects of Plummeting Oil prices: UK inflation slows; Russia faces economic turmoil

As oil prices have been plummeting in recent weeks, reaching $59 a barrel for the first time since 2009, letís take a look at the global political-economic effects thereof, and see how different countries are reacting.

The price of a barrel of oil has fallen by almost 50% since June of this year, and when a commodity as important as this drops this sharply, the effects are felt all over the world. The fall comes as supplies of oil and gas increase dramatically, while demand dwindles or at best stagnates.

Mark Carney still maintains that the falling oil prices represent an ìunambiguously net positiveî for the UK economy, acting as one of the driving forces in the recent drop in CPI inflation (to 1%). Yesterday the Monetary Policy Committee met for their December meeting, and seemed fairly convinced that by the end of December, inflation will fall to below 1%, making it seem more and more likely that Mr Carney is going to have to reach for the pen and paper to explain to the chancellor the shortfall between the reality of inflation and the 2% target set by Bank of England.

During this meeting the MPC discussed the effects of this on the current Bank of England interest rate. The minutes showed that the majority (in a 7-2 split) were in favour of maintaining the interest rate at its record low of 0.5%, which is good news for anyone with a mortgage. Increasingly, analysts are not predicting an interest hike until at least the final quarter of 2015, and indeed this was more or less confirmed by Carney yesterday.

Meanwhile in Russia, news of the sharp drop in oil prices has been taken very differently. Russiaís economy relies very heavily on oil and gas prices staying high; collectively the commodities account for 70% of Russiaís exports, and a significant proportion of government expenditure. Up until now Russia has been dangerously optimistic about their utter reliance on energy exports in the running of their country, believing oil prices to consistently remain high enough to fuel their economy (pun intended).

The resulting panic has caused economic policymakers at Russiaís Central Bank to hike up interest rates to a staggering 17% overnight, following a previous raise to 10.5% (from 9.5%). The Rouble saw 25% inflation just over Tuesday as a result of the general economic maelstrom which the troubled world power is caught in the midst of. We are seeing the worst economic crisis to grip Russia since the Soviet era.

However even this has not been enough to halt the freefall of the rouble, which has, over the last year, lost more than half of its strength against the dollar. The Roubleís general instability led Apple to pull out of Russia entirely, previously a promising market for the technology giant.

More and more foreign investors are being scared away from Russia amid fears that capital controls may have to be introduced to handle the countryís crumbling economy,

All of this comes off the back on Western sanctions imposed on Russia following the forced entry into and land grab from Ukraine.

The dramatic shift in oil prices also adds to the general melting pot that is the Eurozone at the moment, where the threat of deflation and economic stagnation hang ever in the foreground.

While, said Chris Williams of Markit, ìthe Eurozone saw slightly faster growth of business activity in December but still ended the year on a whimper rather than a roar, with worrying weakness still evident in the core countries of France and Germany.î