Citigroup Inc (NYSE:C), a Manhattan, New York-based banking institution, has said that the current plunge in oil prices will provide $1.1 trillion in stimulus to the global economy. The low prices of fuel are expected to lower the cost of production, which will in turn result in a drop in prices of commodities.
The current prices of fuel indicate a low that hasn’t been reached within the past 4 years.
Citigroup Inc (NYSE:C) has estimated that the low prices lead to $1.8 billion in savings every day, something that’s expected to impact positively on the global economy. With the prices still expected to go down even further, more people and companies will have some extra cash to spend from fuel savings.
The price of Brent crude has been falling since June and has now reached 30% low to sell at around $83 a barrel.
“A reduction in oil prices also results in a reduction in prices across commodities, starting with natural gas, but also including copper, steel, and agriculture,” Citigroup Inc (NYSE:C) Global Head of Commodities Research Edward Morse said yesterday in an e-mailed response to questions. “All commodities are energy intensive to one degree or another.”
The global production of oil has been on the rise, particularly in the U.S. and Canada where experts have done a lot to explore diverse sources. Organization of the Petroleum Exporting Countries (OPEC) too hasn’t acted to control the surplus in the market, something that’s likely to lead to further decline.
Citigroup Inc (NYSE:C) head of European energy research Seth Kleinman also agrees that the falling oil prices is a big stimulus to economies. Kleinman says that U.S. felt the pinch of the high oil prices, having to spend a lot of money towards the Middle Eastern oil producing countries. Now, the trend is reversing.
Although the global economy receives a boost because of the slump in oil prices, oil exporting countries such as Russia, Iraq, Iran and Saudi Arabia might face huge challenges in terms of revenue.
This article has been written by Victor Ochieng.