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Falling Energy Prices Point to Weakening World Economy

Falling Energy Prices Point to Weakening World EconomyFalling Energy Prices Point to Weakening World Economy

A sharp fall in energy prices around the world signals worse to come for the slowing global economy as China's decade-long boom peters out, in addition to Europe's long struggle with recession.

The price of oil, the world's most important fuel source, has dropped 20 percent since the summer to below $92 per barrel on Thursday, a level last seen in June 2012, Reuters reported.

Energy analysts initially said the price declines were largely the result of greater supply, citing the North American shale boom, the tapping of new offshore reserves worldwide and greater output of coal.

But analysts have also begun pointing to a slowdown in demand. They cite China's ebbing thirst for oil and what could its first drop in demand for coal in over a decade as indicators of a sharper slowdown in the world's second-biggest economy.

"China's initial (economic) acceleration has faded. With the US acceleration reaching its limits, we have seen our GLI (Global Leading Indicator) slip into 'slowdown'," Goldman Sachs was quoted by Reuters as saying on Thursday.

"Without re-acceleration outside the US, this may not change quickly," the bank said.

Goldman said China could still get close to its economic growth target of 7.5 percent for this year, but "there is a good chance of more slowing early next year".

That would have profound implications worldwide, since the economies of China and the United States have been growing, while Europe and Japan continue to struggle in the wake of the financial crisis.

"Overall, the global economy is weaker than we had envisaged even six months ago," International Monetary Fund chief Christine Lagarde said in Washington on Thursday. "Only a modest pickup is foreseen for 2015 as the outlook for potential growth has been pared down."

 

  Demand Shrinks, Supply Rises

Further affecting demand for fossil fuels, households and industries in developed economies are becoming more efficient in using energy and are moving more to renewables and other alternative fuel sources.

Coal, the world's most important source for electricity generation, has almost halved in value since spring 2011 to levels at which most producers are losing money.

Gas prices in Europe have fallen over 6 percent this year despite the crisis between Russia, its main supplier, and Ukraine, a vital transit route for EU imports.

China's gas demand growth is expected to ease to its slowest in three years in 2014 and dip again in 2015, due in part to its slowing economy. In the oil market, moves by Saudi Arabia, the world's biggest exporter, are crucial to determine volumes and pricing.

The recent rise in the dollar has mitigated oil price declines in Europe and Japan, but Reuters data shows that the price drop in oil has far outpaced the fall in the euro and the yen against the greenback.

 

Financialtribune.com