WHY IS OIL STILL THE MOST IMPORTANT COMMODITY IN THE WORLD?

Whether you like it or not, oil is still the most important commodity in the world.

Its price can tell us not only what is really going on in the world economy right now but has a great influence on what could happen in the future. Right now, it is telling us that the world economy is in big trouble – a crisis not yet revealed in backward-looking economic growth figures.

There was a worldwide shock last week at the freakish reading of a price of MINUS-$40 for a barrel of US oil. This was eye-catching but slightly misleading.

Oil is traded in contracts that expire on a given day of the month. Whoever is left holding the contract when the contract expires must take actual delivery of the physical oil. Most people who trade oil have never, and will never, see a barrel of oil, let alone take delivery of one.

Oil contracts are used by airlines and industrial companies to manage or insure themselves against big swings in their fixed costs. A chronic lack of storage capacity in the US meant that the usual erratic swings on contract expiry day became extreme, as traders were willing to pay anything so they were not left holding the barrel.

Is cheap oil a good or bad thing? 

Just as the sky-high oil prices can trigger recessions, low oil prices can aid recoveries. A massive fall in the oil price is like a global tax cut on businesses big and small. If airlines can survive, and the traveling public return, then they could lock in low prices for their biggest single outlay – fuel.

Likewise, haulers, florists, supermarkets will all benefit from lower transport costs and more money in their customers’ pockets, thanks to lower prices at the pump.

Petrol prices are already headed towards a £1 a liter and are expected to dip below that for the first time in nearly a decade. However, there is some evidence that petrol retailers are trying to increase profit margins to compensate for big falls in the volume of sales.

By: Dominique Dasilva