Oil cost collapse due to supplier price war – not weak demand

Chris Papadopoullos
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PLUMMETING oil prices will prove to be positive for global economic growth and are not a reflection of a slowdown, the UK’s biggest fund manager has said.

Some observers had worried that the collapse in oil prices could have been the result of a fall in demand for oil and therefore a signal of a slower global economy.

However, Legal and General economist James Carrick points out that supply has been rapidly increasing thanks to new technological developments.

“We don’t think that lower oil prices are the proverbial canary in the mine of collapsing global demand for oil,” Carrick told a London audience yesterday.

“A more likely explanation for the lower oil prices is that Opec has launched a price war on new technologies such as US shale.”

The developments in technology were likely brought on by rapidly rising oil prices before the financial crisis, he adds.

However, Carrick believes the fall in oil prices cannot be fully explained by increased supply. Instead he believes Opec are fixing prices low in order to fend off competition. Consumers are key winners, Carrick says, with people who fill up their cars left with more cash in their pockets. Firms will also benefit, but it is not clear how much cost savings will be passed on to shoppers.

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