Investors all around the globe are stressing about the oil crisis.
Volatility has hit the world's equity markets; energy stocks such as Woodside Petroleum Limited (ASX: WPL) and BHP Billiton Limited (ASX: BHP) have been hammered while multi-billion dollar projects are at risk of being canned. If the price does fall much further, the geopolitical consequences could be enormous, spanning from higher unemployment in net exporting countries to worldwide recession.
But then again, there are plenty of reasons to be thankful for lower oil prices. While the financial media like to focus on the bad news, there are actually a number of reasons as to why this low price environment could help the Australian, and indeed, the global economy.
The fact is, oil and its derivatives play a central role in today's society. Every day, millions of dollars are spent on petrol for transport or for use in pharmaceuticals, amongst other things. By reducing these costs, consumers and companies have more money to spend on other goods and services which can drive economic growth.
As reported by The Australian Financial Review, Australia and New Zealand Banking Group's chief economist Warren Hogan has stated that the current $1 a litre price tag on petrol in Sydney is akin to half a 0.25% interest rate cut. Similarly, Shane Oliver, chief economist at AMP Capital, has noted that: "The fall in petrol prices flowing from lower oil prices has so far cut the average Australian household's petrol bill by around $14 a week."
Of course, it's impossible to tell whether that money will actually result in stimulatory spending. Given the uncertain economic outlook and the rising unemployment rate, consumers and businesses could choose to withhold those savings until the situation becomes clearer. If spending does increase however, companies such as JB Hi-Fi Limited (ASX: JBH) and Scentre Group Ltd (ASX: SCG) could be amongst the beneficiaries.
It's also very possible that these lower prices will fuel economic growth in some of the world's emerging economies, including China. The World Bank recently estimated that a 10% decline in the oil price could add between 0.1% and 0.5% to an energy-importing country's growth. The oil price has now fallen by roughly 55% in the last seven months which could drastically increase these countries' gross domestic product (GDP), and possibly increase demand for steel products and various other commodities.
