The drop in fuel prices has come as a welcome relief to many Australians. But financial analysts are warning of possible consequences that may not be so palatable.

 

As the price of oil plummets more people (around the globe) become more willing to buy it. For other energy industries this becomes a problem. They can drop their own prices, to become competitive; or wait it out, take the loss, and hope for oil prices to rebound soon. Either way it means significant losses for these energy providers, at least in the short term.

For Australia this is concerning as Australia is a net exporter of gas.

Gas and oil prices track one another closely. So natural gas exporters like Origin, Woodside, and Santos will be having some awkward meetings with shareholders and revising their budgets for future years.

Less money coming into an LNG company means less to spend on future projects. Oil and gas exploration has shrunk noticeably in the last year. Less revenue will only act as a disincentive for further exploration.

Less exploration means less gas in the future. So as the price per barrel begins to climb again prices at the bowser will skyrocket as consumers compete for fewer energy options.

More pressingly, cheaper oil prices is damning news for the federal government. As oil prices drop so too does the revenue from petrol and other taxes associated with the use of energy and transportation. This forecast revenue (already factored into the federal budget) is now no longer there; and the shortfall must be made up elsewhere if the government is to meet its goals.

Another concern relates to the factors driving the drop in oil prices. Accusations have been made that the US and Saudi governments are conspiring to wage an energy war against Russia (the largest gas exporter in the world). If this is true then you can expect prices to skyrocket after the war. And you can expect some kind of retaliation by the Russian government.

But there are also murmurs that the drop in oil prices reflects a drop in worldwide consumer demand. If this is true then it reflects a slowing global economy. Europe, China, and Japan are already posting slower economic growth rates. Lower oil prices may act to boost growth rates, but it may also stand as a signpost of deflation.

Finally, as stated in a previous article, the profits from oil production and export are all that keep some country’s leaders in power. Saudi Arabia, United Arab Emirates, Kuwait, Iran, Mexico, Venezuela, Algeria, Brazil, Nigeria, and Libya face uncertain times as plunging oil prices flow onto job cuts in their huge oil industries.

These job cuts, to varying degrees, will result in social and political instability. This instability will have far reaching consequences.

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