Week 49, 2014: Oil Prices

Summary: Over the past few months, the price of oil has fallen dramatically from over $110 per barrel to under $70. This has had an impact on almost everything, including inflation here in the UK, but it is likely to have the biggest impact on Russia.

What does the chart show? The blue line, measured against the left hand axis, shows the closing price of a barrel of Brent Crude oil in dollars each month for the past ten years. The red line, measured against the right hand axis, shows the average number of Russian roubles you can buy with one US dollar each month. The axis has been inverted so that a weakening rouble is represented by downward movement.

Why is the chart interesting? Until recently, the price of oil had barely dipped below $100 per barrel in over four years. While the current price (around $70 per barrel) is far from the lowest it has been in the last decade, it nevertheless represents a serious shock to the system. We have seen the low price begin to feed through into UK inflation figures already, and it may have a greater effect at the beginning of next year as the cost of doing business falls. For major oil producing nations, however, it will have an even bigger impact.  There have been warnings that new oil sources might not be exploited while prices are so low (although as costs of production and transportation are also lower for oil companies, the cut-off point for this may be nearer to $40), which might harm future supplies.

But the real effect on countries reliant on oil exports can be seen in Russia.  The rouble has been loosely linked to the price of oil for a long time, but the latest price drop has seen the rouble weaken to over 50 to the dollar - the highest it has been in over a decade.  The Russian government is also in trouble, as their budget deficit is inextricably linked to the price of oil.  One estimate suggests that at a price of $70 to the barrel, the government deficit will be almost 4% of GDP this year, compared to a surplus of 1% at the old price of $110.  That is a big different to have to unexpectedly make up, and they will be hoping that oil prices pick up again soon.  A fall to under $60 would be disastrous.