What effect does the price of oil have on the UK economy?

What effect does the price of oil have on the UK economy?
February 1, 2015 CashLady
What effect does the price of oil have on the UK economy?

The price of oil is something that feels fairly divorced from real life for most people. What happens to the oil companies’ profits, or to those who are trading on the prices, really has no impact on our every day lives, correct? Well, no. Given the amount of oil that is used to power any economy there is actually likely to be a significant impact on the UK economy from the recent drop in oil prices. This is particularly the case as the drop is one of the most significant that we have seen since 2009. Over the past seven months oil prices have almost halved and that means that the cost of using oil for both individuals and businesses has fallen quite significantly.

What are the effects of oil price going down?

In terms of the general affect on the economy, the fact that oil prices have dropped so much could have a very significant impact on consumers in the UK. This is because the drop could well act as a serious stimulant to the economy, giving businesses more room to move within their budgets and enabling them to pass the savings that they might be making on to consumers in the form of lower prices. Oxford Economics, which provides economic forecasts and data, has estimated that if the price of oil drops to less than $40 per barrel in the near future then it could add more than half a per cent to growth in the UK this year.

There are many ways in which the price of oil can affect the various costs that we pay for on a daily basis. For example, the fuel savings that are made by haulage companies are normally passed on to the customers of the haulage companies, which should translate into lower prices for anything that needs to be transported around the country by haulage, such as household goods, from tinned foods through to milk and bread. Cheaper prices will help to boost consumer spending, as we’ll all be able to get more for our money. We’ll also benefit from the drop in petrol costs and the increase in competition that we will see as supermarkets start stepping up in order to try and win customers from one another as public spending picks up more. In terms of monthly budgeting, the hope is that the drop in oil costs will be translated by energy companies into a drop in gas prices, something that has been causing consumers great consternation for many years, particularly in the winter months.

Finally, the knock on impact of low oil prices could help anyone with a mortgage, as well as first time buyers. This is because it could well have the effect of delaying the increase in interest rates that many have predicted for this year from the 0.5% rate currently maintained by the Bank of England. Fuel and energy costs are one of the factors that influence inflation and this is key to the Bank of England deciding whether or not increase interest rates. If rates go up then mortgages will cost more so the hope is that oil prices can help keep them down.

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