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Oil prices and the global economy

oil prices downKen Rogoff (Harvard University) recently wrote a very informative piece on the Project Syndicate website. He discussed the relationship between the drop in oil prices and its impact on economic growth. The price of oil has dropped from US$114 in June 2014 to $45 in December 2015 but the global GDP increase has only been around 0.5%. Over the last 20 years there have been a number of rapid fall in oil prices.

1985-86 – OPEC members decided to ignore quotas in the hope of regaining market share

2008-09 – The GFC saw a demand shock which shouldn’t have a significant impact as in the past the supply has adjusted to the reduced demand.

2014-2015 – the reduction in the price of oil has both demand and supply factors. A slowing Chinese economy has seen a downward movement in commodity prices – less demand for oil. This has been accompanied by increasing oil supply mainly from the fracking industry in the USA:

2008 – 5 million barrels a day.

2015 – 9.3 million barrels a day

Lower prices = more disposable income.

With lower prices consumers should have greater disposable income but it hasn’t stimulated a significant amount of extra demand. However Rogoff does mention that the emerging-market importers have a much larger global economic footprint than they did in the 1980’s, and their approach to oil markets is much more interventionist than the advanced countries.

China and India subsidise retail energy markets to keep prices lower for consumers but the drop in oil prices has meant that lower subsidies are now required and what government’s have saved has gone towards other areas of spending.

Oil is now seen to be less of a driver of global business cycles and even with investment in exploration falling by $150 billion in 2015 futures market have oil prices rising to $60 a barrel only by 2020.

2016 brings its challenges to oil producers with a forecast of tightening monetary conditions.

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