Seven Questions About The Recent Oil Price Slump


By Rabah Arezki and Olivier Blanchard[1]

(Versions in عربي中文, Français, 日本語Русский, and Español)

Oil prices have plunged recently, affecting everyone: producers, exporters, governments, and consumers.  Overall, we see this as a shot in the arm for the global economy. Bearing in mind that our simulations do not represent a forecast of the state of the global economy, we find a gain for world GDP between 0.3 and 0.7 percent in 2015, compared to a scenario without the drop in oil prices. There is however much more to this complex and evolving story. In this blog we examine the mechanics of the oil market now and in the future, the implications for various groups of countries as well as for financial stability, and how policymakers should address the impact on their economies.  

In summary: 

  • We find both supply and demand factors have played a role in the sharp price decline since June. Futures markets suggest that oil prices will rebound but remain below the level of recent years. There is however substantial uncertainty about the evolution of supply and demand factors as the story unfolds.
  • While no two countries will experience the drop in the same way, they share some common traits: oil importers among advanced economies, and even more so emerging markets, stand to benefit from higher household income, lower input costs, and improved external positions. Oil exporters will take in less revenue, and their budgets and external balances will be under pressure.
  • Risks to financial stability have increased, but remain limited. Currency pressures have so far been limited to a handful of oil exporting countries such as Russia, Nigeria, and Venezuela. Given global financial linkages, these developments demand increased vigilance all around.
  • Oil exporters will want to smooth out the adjustment by not curtailing fiscal spending abruptly. For those without savings funds and strong fiscal rules, budgetary and exchange rate pressures may, however, be significant. Without the right monetary policies, this could lead to higher inflation and further depreciation. 
  • The fall in oil prices provides an opportunity for many countries to decrease energy subsidies and use the savings toward more targeted transfers, and for some to increase energy taxes and lower other taxes.  
  • In the euro area and Japan, where demand is weak and conventional monetary policy has done most of what it can, central banks forward guidance is crucial to anchor medium term inflation expectations in the face of falling oil prices.

Again, our simulations of the impact of the oil price drop do not represent a forecast for the state of the world economy in 2015 and beyond. This we will do in the IMF’s next World Economic Outlook in January, where we will also look at many other cross-currents driving growth, inflation, global imbalances and financial stability. 

What follows is our attempt to answer seven key questions about the oil price decline:

  1. What are the respective roles of demand and supply factors?
  2. How persistent is this supply shift likely to be?
  3. What are the effects likely to be on the global economy?
  4. What are likely to be the effects on oil importers?
  5. What are likely to be the effects on oil exporters?
  6. What are the financial implications?
  7. What should be the policy response of oil importers and exporters?

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Mideast Oil Exporters Face the Crisis Head On


By Masood Ahmed

Middle East oil exporters are squarely facing the worst financial crisis since the Great Depression head on. Despite the sharp drop in oil prices last year, the oil exporters rightly decided to maintain spending by drawing upon reserves amassed during the boom years.

High public spending and exceptional anticrisis financial measures have not only cushioned oil exporters’ own economies but are also contributing to sustaining global demand. They have also helped the interlinked economies of neighboring oil importers. 

Facing this boom-bust cycle 

Between 2004 and 2008, Middle East oil-exporting countries grew by about 6 percent a year and accumulated $1.3 trillion in foreign assets. With the striking drop in oil prices—from a peak of $147 per barrel in mid-2008 to around $30 per barrel at the beginning of 2009—the countries of the Gulf Cooperation Council (GCC) have been hardest hit. Iraq and Saudi Arabia are expected to see the most pronounced drops in oil GDP growth—8 and 15 percentage points, respectively—this year.

Despite sharp drop in oil prices last year, oil exporters rightly decided to maintain spending by drawing on reserves amassed during boom years (photo: Wathiq Khuzaie/Getty Images)

Despite sharp drop in oil prices last year, oil exporters rightly decided to maintain spending by drawing on reserves amassed during boom years (photo: Wathiq Khuzaie/Getty Images)

During the precrisis boom years, banks had lent substantial amounts for real estate and equity purchases and made large profits. With the onset of the crisis, asset values fell sharply and the global deleveraging led to a severe tightening of credit conditions, especially in the GCC. Banks’ balance sheets have come under pressure credit growth has slowed sharply—up to 40 percentage points in Qatar.

 

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