The price of oil hit a five-year low on Friday, having fallen by 14% in the last two weeks.
This recent fall was triggered by the Organisation of Petroleum Exporting Countries (OPEC)'s surprise decision to maintain their current crude oil output despite declining prices. This was a tough decision for OPEC, under pressure to cut production and arrest falling prices, which are down by 40% since the summer.
The primary reason behind this collapse is a sharp rise in the production of oil by non-OPEC nations, especially the US and Canada.
The fracking revolution in North America has delivered a massive supply shock to the market for oil. US monthly crude oil output has doubled since September 2008 and is now at its highest level in 28 years. Less than 10 years ago, America was the world's largest importer of refined oil. Today it is the world's largest oil producer and the International Energy Agency expects it to achieve "energy independence" by becoming a net exporter of oil by the end of this decade.
In addition to this glut in supply, unexpected economic weakness in Europe, Japan and China has lowered demand. Over the last five months, the US Energy Information Administration has downgraded its forecasts for global oil consumption this year and the next by 0.5 million barrels per day.
Although rising oil prices are often seen as a good thing, signalling strong global demand, a supply-shock-induced fall is not an entirely bad phenomenon. It could provide a welcome stimulus to global growth. Last week, the International Monetary Fund (IMF)'s Managing Director Christine Lagarde said that the Fund believes this a decline in oil prices will add 0.8% to GDP growth for most advanced economies.
A decline in prices constitutes a transfer of wealth from oil producers to oil consumers. According to the Economist, a $40 fall in the price of oil effects a $1.3tn annual transfer to consumers. For energy-hungry businesses and households, this is equivalent to a tax cut: they spend less on energy and, therefore, should see a boost to their disposable incomes and consumption. While the oil producers suffer a loss, on balance, global consumption rises.
This year's fall in prices will also exert a downward pressure on already-low headline inflation in the developed world. This should support growth further by raising real incomes and reducing pressure on central bankers to raise rates.
In the UK, falling food and motoring fuel prices have driven headline inflation well below the Bank of England's 2% target. While growth in nominal wages has been roughly flat over the year, a 0.7 percentage point fall in inflation has boosted real incomes.
The Bank expects falling commodity prices and a stronger pound to reduce inflation further. In its latest Inflation Report, it has forecast that inflation could fall below 1% in the next five months, the first such instance since the Bank gained independence in 1997. This should further ease any pressures on the Monetary Policy Committee to raise rates, ensuring a more supportive monetary policy stance for longer.
These effects of lower prices are not restricted to the UK. Major oil importers in the developed world such as the euro area and Japan also stand to benefit greatly from them. In a world of considerable uncertainty, a lower oil price should offer an important support to activity in the western world in 2015.
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