Falling oil prices are a benefit, but it will take time to see that

The direct positive effects of cheap oil have become less pronounced this time. When markets are as volatile and gloomy as they are now, not only is bad news seen as worse than it is, but even good news is cast in a negative light

PUBLISHED : Tuesday, 02 February, 2016, 12:37am
UPDATED : Tuesday, 02 February, 2016, 12:37am

Falling oil prices are supposed to be a good thing. So why is everyone panicking? The roller-coaster ride in the price of oil is exactly mirrored in equities markets from Asia to Europe and North America. The recent drastic plunge below the psychological level of US$30 a barrel has contributed to a darkened mood among global investors.

Brent crude and West Texas Intermediate, two international benchmarks, have recovered somewhat since last week, as have equities, which responded well to the Bank of Japan launching a negative interest-rate policy.

This has become something of an anomaly. These days, when energy prices fall, stock markets drop with them. When they rally, equities tend to do well.

But cheap oil prices have historically been good for most economies. They shift wealth from producers to consumers, from energy exporters to importers. India and China, both net importers, should benefit. Since everyone is worried about a slowing Chinese economy, why is cheap oil not seen as a positive boost?

In time, it will indeed bring forth the intended benefits for many importing countries like China. But people are focusing on the short term, and the steep and swift drops in oil prices to below US$30 a barrel have sent shock waves around the world. Many simply see it as a symptom of falling demand as global economic growth slows.

To this, we must add geopolitical factors into the mix, as oil inevitably does.

Despite excess supplies, Saudi Arabia continues to pump at full tilt. It has made no bones that it wants to drive out rival producers, especially Iran, which is just freeing itself from the shackles of international sanctions.

Many emerging economies that rely heavily on oil exports, such as Russia, Venezuela and Colombia, are also prone to social and economic instabilities.

As a result, the direct positive effects of cheap oil have become less pronounced this time. When markets are as volatile and gloomy as they are now, not only is bad news seen as worse than it is, but even good news is cast in a negative light.

It may take a while for economies to see the benefits of cheap oil and for the gloomy outlook to turn around.

In the meantime, the anomaly of a correlation between the prices of oil and stocks will likely continue for some time.