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Households benefit from cheaper oil

The price of a barrel of crude oil has dropped by more than 25% since its peak and is now at a post-2010 low. This is good news for private households and should lift consumer spending and, by extension, spur economic growth, according to Danske Invest's chief analyst.

Global consumers now have more money to spend on the sweet things in life after lower oil prices have triggered a decline in energy-related expenses, leaving room to buy other goods. Generally speaking, cheaper oil is therefore good news for the global economy, according to chief analyst Bo Bejstrup Christensen. In some countries, however, the price fall also represents a challenge.

Mr Christensen points to a number of areas in which cheaper oil will have an impact.

Consumption boost in the US and Europe
The declining oil prices lift consumer spending levels in regions such as the USA and Europe, which are net oil consumers. Lower oil prices give consumers more money to spend on other products.

“This should lead to a boost in consumer spending, for example in the USA, where the lower oil prices will have a direct positive impact on consumers,” says Mr Christensen.

Large energy consumption goes hand in hand with large general spending
Research shows a correlation between households' energy consumption and their general spending habits. In this context, Mr Christensen indicates that oil prices in particular could have a major impact on consumer spending in general.

“Those who spend the bulk of their income on energy-related goods are people with relatively low incomes. These are often the households with low savings ratios,” Mr Christensen says. This means that the money they save on petrol, for example, will more likely be spent on other purchases rather than be allocated to savings. In other words, consumer spending is set to rise.

Lower oil prices add pressure on European inflation
Whilst the cheaper oil benefits consumer spending in Europe, among other places, it also creates some challenges. Europe is fighting a low rate of inflation, and declining oil prices only makes things worse.

“Europe is facing the plunge in oil prices at a time of very low inflation – much lower, in fact, than the target set by the European Central Bank (ECB). The lower oil prices could make the ECB’s task of raising inflation more difficult in the very short term. It is important to remember, however, that the lower oil prices stimulate growth, so even though inflation is falling, economic growth stands to benefit. At least, that is good news,” says Mr Christensen.

Energy-producing countries at the losing end – China will be the winner
The falling oil prices have dealt a severe blow to countries that generate huge incomes from the extraction and sale of oil. These countries include Russia, which has a large oil and gas production enterprise, and selected countries in Latin America such as Venezuela.  Conversely, countries at the tail end of the oil pipeline are cheering, including China, a major consumer of oil.

“This is good news for China. The lower oil prices come at a propitious time for the Chinese economy, which has recently experienced a soft patch,” Mr Christensen said.

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