So what the’s fallout for oil and the oil related sectors around the world from what’s shaping up as the 4th major oil shock since 1973?
The AMP’s chief economist, Dr Shane Oliver reckons that on the whole the impact will be positive.
But he says just how far the oil price will fall is anyone’s guess (just as its rise last decade was). “But history tells us that it can fall much further than you think until supply is finally cut back?”
He points out that in the 1980s and 1990s the oil price fell more than 70% before the bottom was hit (chart at left below).
And more recently oil prices plunged 78% though the GFC but the fall was short lived and supply in recent years has expanded not fallen as a result of the US shale oil revolution.
“So a fall back to around $US40 a barrel is not out of the question,” he says.
"The 35% plunge in the global oil price since June is bad for energy producing companies and countries but is a huge positive for the global economy generally.
“Rough estimates suggest a boost to growth in industrialised countries and in Australia of around 0.3-0.4% if the fall is sustained."
He says the price fall will It bear down on inflation.
(Indeed deflation for the Eurozone in the next month or so is a very real prospect, and a return to deflation in Japan, is back on the cards). And even in the US the fall in energy costs could see consumer inflation turn negative for a month or two in the next three or four.
But that is likely to be brief, and not to be a bout of real deflation, just an example of disinflation.
The big impact will be on the viability of the cause of the surge in US oil output – the oil shale and fracking sector.
Many producers are marginal at the moment with costs well above $US70 a barrel. If the current price level is sustained, then many of these companies could collapse, be forced to merge, or will struggle on, unable to produce more oil and to maintain the high pace of drilling that oil share production needs.
That’s why the prices of many US shale oil companies fell by 5% to 15% (and in some cases more) on Friday.
Renewable energy and its suppliers will also be hit as green energy sources come under pressure from the falling price of oil, gas, petrol and coal,
Dr Oliver says there will mean more pressure on China, Japan and Europe to ease further and a further delay in the timing of the first Fed rate hike and likewise for the RBA.
For Australian households, petrol prices have further to fall to around $A1.25/litre on the basis of the oil price fall to date (chart at right below).
This will translate to roughly a $10 a week saving for the average family petrol bill since June (bottom chart below).
And then there’s the damage to the Federal budget in Australia from a lower oil price, which will mean lower fuel excise revenues.
The Federal government is already battling the impact of lower iron ore and coal revenues on the budget via lower company tax payments.
But over time, lower oil prices could see a rise in consumption as people use their vehicles more. But that wasn’t the experience after the GFC when prices last reached these levels.
There was also fear about jobs, the financial system as a whole and of a possible recession which caused consumers to pull their heads in.
It is different now, compared to then – but confidence among consumers and business isn’t solid at the moment, savings are still high, and the small gains in the stockmarket so far in 2014 have been destroyed, leaving only higher house prices to make people feel wealthier and more confident.
