Cheaper oil is a slippery business

THE global growth dividend from falling oil prices risks getting overhyped. Crude's sharp decline is widely seen as good for a still struggling economy. Yet its main impact isn't to boost total world output but change the distribution of income. And even this GDP shift from oil-exporting to oil-importing countries is likely to be much less than one per cent.

If the price of oil closely reflected its cost of production, the 40 per cent decline since June would certainly be a sign of something dramatic: either the advent of a new and much cheaper source of crude, or a collapse in demand which would soon trigger a significant cut in production. In fact, the drop - from US$115 to US$68 for a barrel of Brent - comes when both supply and demand are fairly stable.

The rate of demand growth has fallen, but total oil consumption is set to be less than one per cent lower in 2014 than was expected at the beginning of the year, says the International Energy Agency. The unwanted excess supply is equally minimal: the IEA reports inventories remain at below average levels. And the average cost of production is not declining sharply; if anything, it is probably rising. Encouraged by more than three years of prices almost always above US$100 a barrel, drillers have been investing in more expensive sources.