Economic Impact of Falling Oil Prices

January 16, 2015

The economic impact of falling oil prices has been a common discussion point for investors over the past few months. Who benefits? Who doesn’t? In this week’s Chart of the Week, we look at what different oil prices mean to various parties.

Oil prices fell by more than 40% in 2014 as a result of strong production and OPEC’s refusal to support prices. Brent crude, the international benchmark for oil, began the year at $110, which is significantly less than the level necessary for certain countries like Venezuela and Iran to balance their budgets. Earlier this week, Brent crude fell to less than $47. According to the Financial Times, an oil price of $90 is necessary for Saudi Arabia to balance its budget, while Kuwait would be happy with levels above $50. In the U.S., the outlook for operators of shale oil developments will be heavily dependent on their cost structures — an oil price of $115 is needed for high-cost producers to break even, but low-cost producers can break even with prices as low as $40. A major beneficiary of the slippery slope in oil prices is the airline industry. With oil at the level of $95, they would see a boost to 2015 operating profits of approximately $15 billion.

The takeaway is that the economic impact of the slide in oil prices is not the same for all market participants. As such, this environment presents interesting tactical opportunities for domestic and international investors with exposures to governments and corporations.