At Societe Generale, Michala Marcussen, global head of economics, reckons every $10 drop in the price of oil lifts global growth by 0.1 percentage point. She estimates that since 2014, the world has enjoyed a windfall equivalent to 2 percent of gross domestic product it would otherwise have spent on crude.
“Our biggest relief last week was that OPEC decided no output cut, promising consumers inexpensive oil for longer,” said Marcussen.
Even though falling oil may weaken the inflation rates central bankers are struggling to lift, Erik Nielsen, chief economist at UniCredit Bank, said it was important to recognize that it’s “‘good’ disinflation, because it stems from supply rather than demand and so should raise real income, thereby propelling consumption and the recovery.”
“A drop in energy prices is the equivalent of a tax cut, with no implications for debt,” he said, adding that faster expansions as a result should end up bolstering prices too and so investors should be wary of wagering on a deterioration in inflation.
Some central bankers are seeing the upside of cheaper oil too. Jens Weidmann, president of the Bundesbank, on Dec. 3 objected to the ECB’s additional easing by saying “the significant energy price declines in fact are supporting the recovery.” Fed Bank of San Francisco President John Williams said last week the effects of falling oil on headline inflation should also soon “peter out.”
I certainly maintain that the big fall in oil prices, created by oversupply and the continued advance of renewable forms of energy and also nuclear power, is a considerable long-term economic stimulus for global GDP growth. Many $billions which were previously transferred to oil exporters, of which there are relatively few, are now largely retained by oil importing countries of which there are many more. These include most developed economies and also the largest Asia-Pacific emerging nations, which have vastly greater populations than oil producing countries.
However, there is also a significant drawback. When Brent crude was trading comfortably in the $100 to £125 region, several oil exporting countries had enormous budget surpluses, controlled by the ruling classes. Led by Saudis they were big spenders, from flash cars to consumer goods, building materials, technology and most of all, expensive military equipment. This demand has largely dried up and will never regain its former heights of only a few years ago.
In the short to medium-term, this lack of demand from oil exporters has largely offset the more widely diffused benefits of lower oil prices. However, over the longer term this will be a tailwind for global GDP growth, led by the increasing Asia-Pacific populations.
Lastly, most people are talking about oil and other commodity prices remaining weak for another year or more. Anything is possible and no one knows the future. However, that is bear talk. The lower prices slide in the near-term, the more sharply they are likely to rebound on supply cutbacks, short covering and bargain hunting. This is very likely within the next six to eight months and it could be explosive if/when the Saudis lead a move to cut oil production. Thereafter, Brent crude may trade mostly in the $60 to $80 range on a medium-term basis; low enough to maintain a global stimulus but high enough help oil producers.Back to top