While falling oil prices are welcomed by many, they may spell serious issues ahead, writes North East of England Process Industry Cluster CEO, Stan Higgins.
The continuing fall in oil prices has been welcomed by many consumers as they see their transport fuel and other domestic energy costs decline.
But the fact is that these attractive short-term economic gains might well be masking severe problems ahead.
The reason for this can be found in the way the industrial supply chain impacts other industries.
Because economies are so interconnected today, negative trends around the world can very rapidly land at our own front door, as we are currently witnessing with the British steel-manufacturing sector.
There are many countries that rely upon oil & gas as the major contributor to their economies.
The Middle Eastern Nations, Norway, Russia, Venezuela, Scotland, Nigeria and Angola, are some examples, but wider impacts soon occur when international economic interconnections begin to flex.
Sooner or later, the impact of these are reflected in currency fluctuations, the price of other commodities, the cost of consumer and industrial goods, and exports and imports.
It is these elements that can weaken the global economy, often far outweighing the initial gains enjoyed by consumers.
Some commentators have suggested that oil prices this year will go even lower than in 2015, as the world’s stockpile continues to rise and, despite the low price, production does not decline to balance this out.
One thing is clear; the impact of low oil prices on manufacturers will not be uniformly positive and there will be winners and losers.
While the UK’s oil and gas sector has lost out in a big way with a severe contraction in output and employment, sectors that use large volumes of imported materials could benefit in the short term as transportation costs fall and overseas suppliers pass on these benefits.
The winners in this scenario are most likely to be the oil-intensive and energy-intensive manufacturing sectors, such as cement, chemicals, industrial gases, metals, machinery and equipment.
Because economies are so interconnected today, negative trends around the world can very rapidly land at our own front door, as we are currently witnessing with the British steelmanufacturing sector.
Stan Higgins, CEO of the North East of England Process Industry Cluster
However, as the pound strengthens, exporting will become more difficult for sectors higher up the supply chain, which are less energy intensive and closer to the consumer.
Many sectors may also lose out as they encounter increased competition from businesses in other parts of the world that can undercut them on price due to lower production and transportation costs.
To put numbers behind this, some analysts are predicting that the overall impact of lower oil prices on the UK economy may prove positive in the short term by improving baseline performance by 1.4% through 2016.
Unfortunately this may not be sustained, however, as they see these benefits falling to 0.6% by 2018, largely as the UK’s economy becomes more exposed to cheaper imports.
These trends have the potential to lead to a downward spiral for the wider global economy, because a lack of economic growth can result in commodity prices that often fail to recover, causing a rapid and often terminal reduction in production.
The double whammy of both lower energy prices and lower prices of imported goods might then result in persistently lower inflation rates and ultimately low or no-growth economies, as debt and unemployment rise.
This scenario helps to explain how rather than reviving our economy, an oil price that continues to fall might instead result in a global recession.
Stan Higgins is chief executive officer of the North East of England Process Industry Cluster.