Why Cheap Oil Isn't All Good News

Despite petrol prices being tipped to fall to 86p a litre if the oil rout continues this isn't all good news for the average person.

Oil prices have fallen by a third since the start of December and well over 70% since the summer of 2014 and now hover at around $30 a barrel.

In spite of the recent price crash, some well-respected investment banks think prices could fall even lower, potentially as far as $10 a barrel, which, according to the RAC (Taiwan OTC: 2237.TWO - news) , would result in petrol prices of just 86p per litre, a saving of 45p per litre on the prices seen in June 2014.

On a typical 50-litre refill this translates to a £22.50 saving every time you refill. Equating to an annual saving of £579 a year assuming a typical driver covers 10,000 miles annually in a car that averages 35 mpg.

This sounds like good news. At the pumps there's no denying we'll be making a significant saving. This is just one reason why inflation has been so lacklustre of late.

So, where's the downside? Well, the price of oil is arguably the most important financial metric out there. It (Other OTC: ITGL - news) 's a barometer for the overall health of the global economy.

So what's driving the collapse in the global oil price? In a word, China.

The world's second largest economy is seeing a significant downturn. Once revered as the global engine for growth, the Chinese economy has stalled.

The other factor which affects us is pension investments. According to Sky (LSE: BSY.L - news) 's business presenter Ian King, Shell (LSE: RDSB.L - news) accounts for £1 in every £6 received in dividends by UK pension funds.

The fortunes of oil companies matter to just about every man, woman and child in the country.

Shell shares are 36% lower in the last 12 months while BP shares are down nearly 15%.

The other thing to bear in mind is the effect on the environment.

Lower fuel prices not only make gas-guzzling cars more attractive to consumers but also encourage drivers to use their cars more often.

Across the pond there is already evidence of this trend with US vehicle sales hitting a new record in 2015 surpassing the previous record set in 2000.

Low petrol prices in the US caused demand for fuel efficient cars to stall, with Nissan's Leaf electric car seeing sales plummet 43%. Toyota's Prius sales fell 11%.

Meanwhile, back in the UK British Airways has shelved plan for a £340m project to produce aviation fuel from household waste.

So although we're winning at the pumps our pensions and carbon footprint look far from rosy.