Oil prices and the world economy: an ambiguous relationship
Experts of the International Monetary Fund: the current episode of historically low oil prices may give rise to various disruptions in the economy
IMF experts Maurice Obstfeld, Jean Maria Milesi-Ferretti and Rabah Arezki recently shared their opinions regarding the price of oil at the blog of the Fund.
In their view, oil prices remain stable low for more than one and half year, but the expected "impetus to the development" of the global economy has not yet become a reality. Experts of IMF argue that the benefits for the global economy from the low prices are likely to show up only after some recovery of the prices.
Many experts believed that the decline in oil prices will have a positive effect on the world economy, deteriorating situation for exporters, but giving benefits to importers. World stock markets do not agree with this theory. Over the past six months or more, the indices of the stock markets sank with the decrease of oil prices - not what one would expect if lower oil prices were generally favorable for the global economy. In fact, as of August 2015 the simple correlation between stock prices and oil prices is not only positive (Fig. 1), but doubled compared to the previous period, counted from the August 2014 (although the level of this increase is not unprecedented).
Oil importing countries with advanced economies, indeed, experiencing a positive impact on consumption (for example, in the euro area), but slightly lower than expected. At the same time investment growth has not met expectations. Lower oil prices make the operations for exploration and production in the private sector less profitable, which also leads to a decrease in capital expenditures in the sector. According to Rystad Energy, reduction of global capital expenditures in the oil and gas sector from 2014 to 2015 amounted to about 215 billion US dollars - about 1.2 percent of global capital accumulation (or slightly less than 0.3 percent of world GDP). Even some oil importers have suffered a lot of damage, in particular the US, which account for a significant part of the global decline in investment in the energy sector.
There is another factor which may inhibit the increase of demand in countries - importers of oil. Unlike previous price cycles, lower oil prices, this time coincide with a period of slow economic growth - so slowly that the major central banks virtually have no opportunity to reduce further the interest rates to support economic growth and to counteract deflationary pressures. As directive rates can’t go any lower, the decline in inflation due to reduction of production costs raises the real interest rate, limiting supply and demand, suppressing an increase in output and employment. In fact, both of these units may be reduced. Something similar may be happening now in some countries. Figure 2 suggests a downward pressure of expected low oil prices on inflation expectations: it shows the close direct link between the prices of oil future contracts in the US market and an indicator of long-term inflation expectations.
"Sustained low oil prices complicate the conduct of monetary policy, risking new bursts of uncommitted inflation expectations. Moreover, the current story with historically low oil prices may give rise to various failures in the economy, including the default on corporate and government debt, which may have a reverse effect on the already fragile financial markets", - said the IMF experts. In their view, the possibility of a negative feedback makes it particularly urgent task of supporting the demand by the international community, along with the various reforms of the structural organization and the financial sector that take into account country-specific conditions.
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