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Cheap oil benefits consumers, hits governments

February 3
6:48 AM 2016

The oil price drop for the 19 months is bringing cheer to consumers, but causing a lot of concern for the global governments and business firms. Many banks and the US government forecast oil price above $40 a barrel this year. The recovery in oil price depends upon narrowing down of gap in oil supply and demand to equilibrium.

The lower oil prices are resulting in financial windfalls for some and huge deficits in the budgets of many countries. Consumers are riding high on less expensive oil and the same factor is eroding the job market drastically. The oil price fell from $107 a barrel to below $30 during the past 19 months. 

The shale oil production surge in the US and firm decision by OPEC not to cut production led the price fall continuously impacting every country and every section of the global economy. The sluggish global economy has further added to the concerns about the demand for oil. The US government forecasts Brent crude at $40 and Bank of America predicts oil price at $46 a barrel this year, as reported by ABC News.

The oil price drop is major factor for uncertainty at several governments. The US households' savings on account of gasoline budget are increasing due to lower prices. The consumer spending is also increasing as the savings are spent elsewhere in the economy. Another major beneficiary of oil price drop is the aviation sector. Airlines spend one-third on fuel and steep fall in oil prices helping their operating margins boost. 

However, profitability of energy companies was drastically hit following the oil price drop. Energy stocks tumbled on stock exchanges and many oil companies announced job cuts. Several oil drillers have also slashed down their headcount and trimmed their budgets, according to NEWS 1130

States such as Alaska and Dakota are suffering from widening budget deficit. Many oil exports-dependent countries too witnessed huge deficits in their budgets as their export revenues tumbled. According to IHS Global Insight, oil price should be in the range of $85 to $95 a barrel for recovering costs at new mines. 

For countries such as Iraq and Nigeria, the situation is much worse in the wake of lower oil prices. Iraq is instituting unprecedented taxation and austerity. Nigeria is seeking $11-billion emergency loans from World Bank. The Iraq's government and social order are on the verge of collapse, if oil price fall further continues, according to Business Insider. Iraq's oil price is less than the half of break-even point. Iraq is selling oil at $22 a barrel. 

Several weaker oil companies are in the process of restructuring exercise, while healthier companies are buying distressed assets. Canadian currency fell 20 percent against the US dollar. Mexico is believed to be weathering the impact of lower oil prices. Oil revenues account for 20 percent of the total economy of Mexico now from 40 percent until 2012. Mexico has halted some projects and postponed some. 

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