Plunging oil prices: Why and what it means
As the world finds more cost-efficient alternatives to fossil fuels, the free fall in the price of oil augurs well for the global economy by boosting growth
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THE past year has seen the world oil price fall by more than 50 per cent. Late last year as the fall accelerated, this started to act as a drag on share markets and this has resumed at the start of this year as the oil price has continued to slide. But what's driving the oil price plunge and isn't a fall in oil prices meant to be good news?
Why has the oil price collapsed?
Put simply the oil price has collapsed because the global supply of oil has surged relative to demand. The last decade saw the price of oil go from US$10/barrel in 1998 to US$145 in 2008. This sharp rise in the oil price both in nominal and real terms encouraged greater fuel efficiencies (such as the use of ethanol and electric cars) and, more importantly, encouraged the development of new sources of oil.
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