Plunging oil price: good or bad?

OIL prices have plunged since mid-September and some analysts believe they are heading for $10 a barrel. The latest falls were triggered by a stand-off between the 11-nation Organisation of Petroleum Exporting Countries and Russia, the world's third-biggest producer.

Opec refused to cut production to support prices unless Russia also curbed its output. But Moscow refused and prices tumbled. Some observers detect America's hand in this - Russian president Vladimir Putin wants a new 'strategic partnership' with Washington, and cheap oil provides a huge stimulus to the flagging US economy. By helping to keep prices down, Putin can expect rewards.

Now both sides are involved in a game of bluff, which is set to last until January 1, by which date Opec will cut 1.5m barrels a day of output - but only if Russia and some smaller producers cut production by 500,000 barrels a day. Otherwise, Opec, which can produce oil more cheaply than most countries, is threatening to flood the market and trigger a price crash.

But if the cuts are agreed, it could add $8 to the price of a barrel of oil, at present between $17 and $18. Such a rise would push up prices on British forecourts by nearly 24p a gallon.

But is cheap oil always good news - in Britain or abroad? The arguments are finely balanced.

THE CASE FOR

CHEAP oil is a shot in the arm for Britain and other industrialised economies. For every $10 fall in the price of a barrel, the UK economy grows by an extra 0.3%. That may not sound a lot, but it adds up to an extra £2.6bn a year - enough, for example, to sort out Railtrack's immediate problems.

Cheap oil means cheaper petrol. Every $3 off the price should knock about 9p off the price of a gallon. That means greater personal mobility and a more efficient economy, as goods are shifted around Britain and abroad at lower cost. That means a more harmonious society: who can forget last autumn's fuel pickets?

Cheap oil keeps a lid on inflation. Petrol and oil make up more than 4% of the retail prices index. Rising prices push up the cost of living - bad news for consumers - and make it harder for the Bank of England to cut interest rates.

Cheap oil also helps to head off recession. An increase is doubly bad news: not only does it push up prices initially, but it fuels unemployment as firms' costs rise out of control. Energy is the one component of the industrial process that cannot be recycled. Fewer than 4% of our workforce is employed in the oil and gas sectors - everybody else wins when the cost drops.

Cheap oil is the best medicine for the economy. MP Vincent Cable, formerly chief economist with Shell and now Liberal Democrat energy spokesman, said: 'It is definitely good news. Lower prices mean more money to spend on other goods.'

THE CASE AGAINST

FALLING oil prices are a benefit only in the very short term. They threaten the political stability of the Middle East, putting particular pressure on the West's key ally in the region, Saudi Arabia. The Saudis need to sell oil at $22 to $24 a barrel to keep their people happy and avoid a political upheaval that could put radical elements in charge of the world's biggest oil exporter. Were that to happen, prices would surge.

Falling oil prices threaten not only the Saudis. A number of key global flashpoints, including South America and Indonesia, will become more volatile as oil revenues dry up.

Falling oil prices make it uneconomic for Britain to develop new reserves on the Atlantic Frontier. This makes us more dependent on imported oil and damages a key centre of technical and engineering expertise - our oil industry.

Falling oil prices discourage conservation-and contribute to congestedroads at home as well as global environmental damage. It is widely accepted that the halfway point in the world's known oil reserves is close to being reached. Cheap prices merely put off the day when alternative energy sources will have to be developed in parallel with real reductions in energy use.

Falling oil prices transfer wealth from mostly poor countries to mostly rich ones. Of the top 15 oil producing countries, only America, Britain, Norway and Canada are fully developed nations. By contrast, nine of the top 15 consumers are in this category.