The last quarter of 2014 was a dramatic one. The sudden fall in the oil price and subsequent knock on impact to the Australian dollar continues to capture the headlines of the popular press. But what are the implications for the economy both here and abroad? Are these events truly as negative for Australia and the global economy as has been portrayed or could this finally be the catalyst to kick start Australia and restore consumer and investor confidence?

The oil price has dropped by 50% in 3 months, with Brent oil declining by over US$50 per barrel as the commodity price dramatically adjusts to increased supply from non-conventional oil and gas production and fears about global energy demand given GDP growth concerns outside the US. Clearly this has a serious short term negative impact on energy producers, and companies servicing this sector as producers look to cut operating costs and production.

In the Australian sharemarket, we have also witnessed the final capitulation of the commodity sector with the 2011/12 mining bubble bursting. The Materials Sector is down 40% since April 2011. However behind the predictable focus on the negative in the media, there are a number of potential positive implications that will flow through to the broader economy including:

• The mining boom created considerable distortions in Australia, driving up the value of the A$, wages, short term mining employment and interest rates. These distortions put considerable pressure on the non-mining part of the economy leading to the “two-speed economy” phenomenon. The bursting of the commodity bubble has eased these pressures, allowing the first stage of the recovery in the non-mining sectors to develop as the benefits of lower A$ and interest rates flow through to the retail, construction, tourism and agricultural sectors.

• For most countries around the world, cheap oil is a good thing. Oxford Economics research suggests that the markets appear to be reacting too negatively and are underestimating the economic benefits flowing from reduced energy costs. In fact, lower oil prices could add nearly 1 percentage point to U.S. GDP, potentially increasing growth by a quarter.

• It’s the Australian dollar commodity price that matters. If we consider Rio Tinto and the drop in iron ore price, it is important that we convert the commodity price back into Australian dollars to see the real impact on Australian RIO shareholders. The US$ iron ore price has fallen 49% over the last year, but with the currency at A$0.81 versus A$1.05 previously, the Australian dollar iron ore price has fallen by a less dramatic 30%. When RIO declares their final dividend in March 2015, it will be in US$ and then converted so that Australian shareholders receive A$ cash. The decline in the A$ is a bonus for RIO’s Aussie shareholders.

Often the hardest part of investing is to remain focused on long term investment analysis in the face of short term news and mass media coverage, especially when that coverage tends be centred on negative implications and the short term consequences of events.