Brent crude close to $62 as agency issues warning of global social instability and potential for financial defaults in producers such as Venezuela and Russia

Terry Macalister and Julia Kollewe 

 
The Guardian

Oil pumps at sunset in Sakhir, Bahrain. 'In time, low oil prices themselves should be their own undoing, as supply withers,' said analysts. Photograph: Hasan Jamali/AP

The price of oil continued its precipitous fall on Friday,hitting five-and-a-half-year lows after the International Energy Agency (IEA) predicted demand next year would be lower than expected.

Benchmark Brent crude has dropped 47% since June and fell to just over $61 a barrel as the IEA warned of the threat of global social instability and the potential for financial defaults in big producer countries such as Venezuela and Russia.

The oil price has plummeted in response to a massive buildup of shale-derived oil in the US, reduced fears of fighting in Iraq disrupting supplies, and slower growth in demand as the world economy falters.

A decision by the Opec two weeks ago to keep its production at existing levels has been taken as a signal by traders and shippers that the producers’ cartel is happy to see prices fall for the forseeable future.

The IEA said in its December monthly oil report that it was cutting its 2015 demand growth forecast by 230,000 barrels a day to 900,000, partly because of falling output in former Soviet countries.

It believed surging US oil supply would push total non-Opec output to a record increase, averaged over the year, of 1.9m barrels a day for 2014, but predicted “the pace is expected to slow to 1.3m barrels a day for next year.”

It also warned: “The resulting downward price pressure would raise the risk of social instability or financial difficulties if producers found it difficult to pay back debt.”

The Paris-based IEA singled out Russia and Venezuela as potential flashpoints for trouble and the warning came as the rouble, which has lost 40% in value against the dollar so far this year, hit a fresh record low. One dollar now buys more than 57 roubles, compared with 35 in the summer.

But while the oil-producing countries face lost revenues and budget shortfalls, lower energy prices are expected to have a beneficial impact on the world economy.

Many countries, particularly in Asia, are desperately dependent on foreign oil and gas imports, so cheaper prices should cut inflation and give impetus to manufacturing output and consumer spending.

Analysts at investment bank ING said: “The recent fall in oil prices may not be sustained but, in the meantime, it provides a very welcome boost to real incomes for most major economies. In time, low oil prices themselves should be their own undoing, as supply withers, although politics will remain a further layer of uncertainty.”

Hans van Cleef, senior energy economist at ABN Amro in Amsterdam, said: “ is following the trend lower. The market has reacted strongly to the Opec forecast cut, and it is focusing only on the negative.” Lower energy prices will cause havoc in the UK North Sea, where companies such as BP and Shell are cutting jobs at a time when exploration levels have already dropped to very low levels.

But householders will welcome the falling gas price cutting heating bills, while motorists will be glad of lower costs at the pump. High home and transport costs are a big influence on inflation and affect the production and distribution of food and other items.

Asda, Tesco, Morrisons and Sainsbury’s all announced they were reducing the price of their petrol by 2p a litre and knocking 1p a litre off diesel.

The Tesco cut took effect from lunchtime on Friday , while the other three big supermarkets will introduce the lower prices from tomorrow.

The average UK price of petrol has now dropped below £1.20 a litre and is at its lowest level since December 2010, according to government figures.

Airlines have said they expect air fares to fall next year if the lower prices continue, but have warned that there are unlikely to be immediate reductions because fuel is bought a long time in advance of use.

There are strong signs in the US that lower energy prices are having a big effect on consumer spending with store and restaurant sales rising by 5% in November against the same month the previous year.

One reason for lower prices is the weak state of the global economy, and no one can predict with accuracy whether oil prices will stay at the current levels or fall further.

Tom Kloza, co-founder of the US-based Oil Price Information Service, has warned that the world could be heading for $45 per barrel oil, although he maintained that this kind of price was not sustainable longt erm.

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