Gary Shilling: Who Gets Hurt When Oil Falls
Comment of the Day

December 23 2014

Commentary by David Fuller

Gary Shilling: Who Gets Hurt When Oil Falls

Here is the opening of this second report on oil by the author, published by Bloomberg:

When the Organization of Petroleum Exporting Countries failed to cutproduction quotas last month, the initial investor reaction was: Hallelujah! Lots more savings for energy buyers! Blowout Christmas spending by consumers!

The celebrations may have been premature.

True, the $1 decline in U.S. gasoline prices since April is the equivalent of a 1 percent rise in consumer spending power. Of course, some of that may be saved and not spent, at least initially. And in countries with fixed fuel taxes, including China, the economic effect will be greater. At the same time, U.S. auto makers may benefit from increased sales of low-mileage SUVs and light trucks, which are highly profitable. 

Net energy importers, including Japan, South Korea and other East Asian countries, also benefit from lower energy prices. China imports 60 percent of the 9.6 million barrels of oil it uses each day.  

Other energy importers helped by lower prices include India, Turkey and Western Europe. Pakistan, Egypt, India and other countries that subsidize energy costs will be able to reduce those expenses. Some of the benefit, though, is offset because the euro and other currencies are weak and oil is priced in more expensive U.S. dollars. 

But the list of oil losers may overpower the winners. Almost immediately, energy companies started to cut capital spending, which equaled 0.9 percent of U.S. gross domestic product in 2013, the largest share since the early 1980s. An index of oil-field service companies is down about 40 percent from its peak. 

David Fuller's view

There are some interesting and controversial points in this article but my view remains unchanged.  Prices near $60 a barrel are a major benefit for countries that import most of their crude oil.  Oil exporters are the big losers, especially high-cost producers.  There are more of the former countries, many of which also have large populations, so lower oil prices are a net gain for the global economy.

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