Biggest transfer of wealth in history coming soon?


As oil prices plunge, wide-ranging effects for consumers and the global economy

By Steven Mufson December 1 at 9:26 PM

Tumbling oil prices are draining hundreds of billions of dollars from the coffers of oil-rich exporters and oil companies and injecting a much-needed boost for ailing economies in Europe and Japan — and for American consumers at the start of the peak shopping season.

The result could be one of the biggest transfers of wealth in history, potentially reshaping everything from talks over Iran’s nuclear program to the Federal Reserve’s policies to further rejuvenate the U.S. economy.

The price of oil has declined about 40 percent since its peak in mid-June and plunged last week after the Organization of the Petroleum Exporting Countries voted to continue to pump at the same rate. That continued a trend driven by a weak global economy and expanding U.S. domestic energy supplies.

The question facing investors, companies and policymakers is how low oil prices will go — and for how long. Every day, American motorists are saving $630 million on gasoline compared with what they paid at June prices, and they would get a $230 billion windfall if prices were to stay this low for a year. The vast majority of that will flow into the economy, with lower-income households living on tight budgets likely to use money not otherwise spent on gas to buy groceries, clothing and other staples.

On Monday, the average U.S. price for a gallon of regular-grade gasoline was $2.77, according to AAA, which projects that prices could drop by an additional 10 to 20 cents.
(The Washington Post)
Big American companies are better off, too. Every penny the price of jet fuel declines means savings of $40 million for Delta Air Lines, the company’s chief executive said in a recent CBS interview.

“Despite the impressive recent gains in natural gas and crude oil production, the U.S. still is a net importer of energy,” William C. Dudley, president of the Federal Reserve Bank of New York, said Monday at Bernard Baruch College. “As a result, falling energy prices are beneficial for our economy and should be a strong spur to consumer spending.”
Although falling oil prices lower inflation, the Federal Reserve tends to view that as a fleeting effect that would not alter its underlying judgments about policy. Nonetheless, Dudley said, “the slump in oil prices may also help to persuade” the European and Japanese central banks to implement further monetary easing as prices remain subdued.

The consequences of the decline in oil prices are also evident in politics and pocketbooks.

At current prices, the annual revenue of OPEC members would shrink by $590 billion, money that will instead stay within the borders of the world’s biggest oil importers, led by the United States, China and Japan.

The size of the global economy will “easily be between 0.5 percent and 1.0 percent higher as a result of the decline in oil prices,” wrote Andrew Kenningham, senior global economist for London-based Capital Economics.

The 40 percent drop in the price of the international benchmark Brent-grade crude oil over the past five months will reduce annual revenue to oil producers worldwide by a whopping $1.5 trillion.

“Those losses are staggering,” Edward Yardeni, president of Yardeni Research, wrote to investors Monday.

The losers include Russia, where the value of the ruble has been crumbling, inflation has crept up to more than an 8 percent rate and oil prices have done more to hurt the economy than Western sanctions.

In Iran, whose economy and government budget rely heavily on oil sales, low prices could intensify the effect of sanctions that have curbed the country’s oil exports in an effort to pressure the regime into reaching a diplomatic accord on its nuclear program.

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