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The Benefits of the Oil Price Plunge

 3 min read / 

After nearly five years of stability in the price of oil, traders are enjoying the most favorable trading conditions, whilst organisations such as BP, Texaco and Petrobras suffer from losses. Consumers, oil importing countries and the some airlines have also profited from the plunge. So, how did these different groups benefit from the fall in the oil price?

It’s the Contango Theory

A contango occurs when the futures price of oil is higher than the current expected price. In this case, traders buy physical barrels of oil at a discounted price, store and sell contracts in the forwards market to lock in a profit. During the ‘supercontango’ of 2008-09, traders stored approximately 100m barrels of oil and the price a year after increased by $17 a barrel for the benchmark Brent. Trading houses such as Glencore, Vitol and Trafigura purchase and stored physical oil have benefitted from the 55% drop in the price of oil since June.

Consumers

In America, around 135bn gallons of petrol are consumed every year. The price is declining by 35% from $3.50 a gallon in June to $2.27 today, generating annual savings of over $160bn or $500 in per capita terms. Consumers around the world are expected to save about $1.3tn from the lower oil price, if the prices prevail. Its effect on the economy may perhaps be compared to that of a large, one-off and unanticipated tax cut. Perhaps, consumers might choose to increase savings rather than consumption in order to pay for the higher petrol prices in the future.

The oil importing countries

Many of the countries in Asia are well positioned for the lower oil prices since most of them are large importers of energy. For example, India imports 80% of its oil, and thus benefitted from the fall in the oil prices as its import bill decreases. Similarly, oil imports are 36% of Pakistan’s total imports and the lower oil price is anticipated to result in a 7.6% fall in its import bill.

The airline industry

The biggest beneficiary of the lower oil price is the airline industry, no doubt. For every airline, fuel is one of the largest expenses, and the US carriers paid an astonishing $51bn for fuel in 2013. Due to the decline in the oil price, the transportation average of Dow Jones rose by 8.2% in the fourth quarter of 2014. But, firms such as Ryanair, Europe’s biggest budget airline, will be missing out on the benefits from the low oil price. Fuel accounts for 45% of Ryanair costs and it has, unfortunately, locked itself into a hedging contract, which requires Ryanair to buy 90% of its fuel at an average price of $92 a barrel.

It will be interesting to see whether the benefits of the lower oil prices will continue to trickle through the economy or whether the price of oil will retrace.

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