Oil experts can explain why the price of crude has fallen by 30 per cent since June. They are paid to come up with reasons for whatever is going on. But behind the glib patter is an intellectual vacuum. Until September 9, the experts' challenge was to justify the extraordinary price stability. The price of a barrel of Brent crude had traded less than eight percent above or below $108 for 448 consecutive trading days, the lowest price variation in decades. Most of the pundits credited Organization of the Petroleum Exporting Countries (Opec) in general or Saudi Arabia in particular for balancing out sanctions, civil wars and a rapid increase of US production.
The cartel-believers have had to pivot rapidly. They now say Opec has suddenly lost clout or that Saudi Arabia has changed strategy. Either story may be true, but the reasons for the rapid change remain elusive. It is even harder for commentators schooled in traditional market economics, who prefer dispassionate analysis of supply and demand to discussions of potentates' deeply strategic or possibly irrational decisions. In their models, price is determined solely by the interplay of such factors as the average or marginal cost of production, the availability of product, the pace of demand growth, and the cost and availability of financing. It strains reason to say these have changed enough since the summer to justify the free fall in the price.
The oil experts may be confused, but the economists who analyse the effect of suddenly lower prices on the global economy should be certain. Their models tell them that consumers will enjoy the equivalent of a tax cut. Money saved on fuel bills will be spent on other things, pushing up the pace of gross domestic product (GDP) growth.
That principle, though, is looking a little shaky. Lower oil prices could also accelerate global disinflation, and high leverage will be harder to bear if falling prices turn into falling wages. Fuel savings may just go to speed up debt repayments. Besides, the missing revenues in producing countries and the loss of oil money in financial markets could cause discomfort. No wonder most macroeconomists have chosen to ignore the oil price.
