Presentation on Effects of the falling price on the global economy

1. EFFECTS OF THE FALLING
PRICE ON THE GLOBAL
ECONOMY

2. THE FALLING IN THE OIL PRICES ARE LARGELY DEEMED TO BE AN
EFFECT OF THE INCREASE SUPPLY OF OIL
LOWER OIL PRICES DAMPENS INFLATION BOTH DIRECTLY WHEN THE
PRICE OF OIL RELATED PRODUCT FALLS AND INDIRECTLY WHEN
PRODUCTION COSTS FOR OTHER GOODS FALL
A FALL IN OIL PRICES WILL HAVE A GREATER EFFECT, IF THE LOWER
PRICES ARE PERMANENT AS COMPANIES AND CONSUMERS WILL THEN
CHANGE THEIR BEHAVIOR MORE THAN THEY WOULD IF THE FALL IN
THE PRICES WAS ONLY TEMPORARY
KEY POINTS

4. THE PRICE FELL FROM 115 US DOLLARS PER BARREL TO 60 DOLLARS
PER BARREL THUS FALLING BY 50%, THIS IS THE SECOND LARGEST
FALL OVER A 12 MONTH PERIOD IN THE LAST 50 YEARS
HE LARGEST FALL OCCURRED IN CONJUNCTION WITH THE
FINANCIAL CRISIS OF 2008–2009, WHEN DEMAND IN THE GLOBAL
ECONOMY FELL RAPIDLY. THIS TIME, THE PRICE DECREASE IS LARGELY
DEEMED TO BE AN EFFECT OF THE INCREASED GLOBAL SUPPLY OF OIL
THE PRODUCTION OF NORTH AMERICAN SHALE OIL HAS INCREASED
SHARPLY IN RECENT YEARS. THIS LIES BEHIND THE HEAVY INCREASE
OF TOTAL OIL PRODUCTION IN THE UNITED STATES AND CANADA.
FALLING OIL PRICE SINCE SUMMER

6. THE OIL CARTEL OPEC HAS NOT DECREASED PRODUCTION TO
MAINTAIN PRICES. INSTEAD , OPEC HAS ALSO INCREASED
PRODUCTION.
AN EXPECTED DECREASE IN DEMAND FOR OIL DUE TO LOWERED
EXPECTATIONS FOR GLOBAL GDP GROWTH HAS ALSO CONTRIBUTED
TO THE PRICE FALL.
GDP GROWTH IN CHINA HAS FALLEN AND IS WEAK IN EUROPE.
NEVERTHELESS, THE INCREASE IN SUPPLY IS DEEMED TO EXPLAIN THE
GREATER PART OF THE PRICE FALL, AND THIS CONCLUSION IS SHARED
BY MOST STUDIES.
ACCORDING TO AREZKI AND BLANCHARD (2014)26, 65–80 PER CENT OF
THE FALL IN OIL PRICES UNTIL DECEMBER LAST YEAR CAN BE
EXPLAINED BY INCREASED SUPPLY

7. IF OPEC REDUCES OIL PRODUCTION, THE PRICE OF OIL WILL
PROBABLY RISE.
A LOW OIL PRICE WOULD PROBABLY ALSO LEAD TO LOWER
INVESTMENTS IN OIL PRODUCTION, INCLUDING NORTH
AMERICAN SHALE OIL PRODUCTION, WHICH WOULD, IN TURN,
REDUCE PRODUCTION CAPACITY AND THUS THE SUPPLY OF
OIL.
OTHER FACTORS THAT COULD INFLUENCE THE PRICE OF OIL
VIA REDUCED SUPPLY ARE THE GEOPOLITICAL TURBULENCE
IN LIBYA AND IRAQ, FOR EXAMPLE, AND UNCERTAINTY LINKED
TO THE CONFLICT BETWEEN RUSSIA AND UKRAINE.
IS THE LOW OIL PRICE HERE TO STAY?

8. IF THE LOW OIL PRICE IS EXPECTED TO BE LONG-LASTING, THE ECONOMY WILL BE
AFFECTED MORE STRONGLY THAN IF THE PRICE DECREASE IS EXPECTED TO BE
TEMPORARY, AS COMPANIES AND CONSUMERS REACT MORE STRONGLY TO A
PERMANENTLY LOWER OIL PRICE. BUT THE EFFECT OF THE LOWER OIL PRICE ON
THE DEVELOPMENT OF THE GLOBAL ECONOMY DEPENDS NOT ONLY ON WHETHER
THE LOW PRICE IS EXPECTED TO BE TEMPORARY OR PERSISTENT BUT ALSO ON
THE CAUSES OF THE OIL PRICE FALL. A PRICE FALL DUE TO REDUCED DEMAND FOR
OIL WILL NOT HAVE THE SAME EFFECTS ON THE GLOBAL ECONOMY AS A PRICE
FALL DUE TO AN INCREASED SUPPLY OF OIL.
EFFECTS OF THE LOWER OIL PRICE ON THE
GLOBAL ECONOMY

9. IN OIL-IMPORTING COUNTRIES, THE EFFECT OF FALLING OIL PRICES ON
GDP GROWTH IS OVERWHELMINGLY POSITIVE. HOUSEHOLDS' SCOPE
FOR CONSUMPTION INCREASES AND COMPANIES' PRODUCTION AND
TRANSPORTATION COSTS DECREASE, WHICH NORMALLY LEADS TO
HIGHER PROFITS, INVESTMENTS AND NEW RECRUITMENTS.
CHINA, INDIA AND INDONESIA HAVE MORE ENERGY-INTENSIVE
ECONOMIES THAN DEVELOPED ECONOMIES AND THEREFORE GAIN
GREATER BENEFITS FROM LOWER OIL PRICES. SOME COUNTRIES,
SUCH AS INDIA AND CHINA, HAVE ALREADY TAKEN ADVANTAGE OF THE
LOWER OIL PRICES TO REDUCE THEIR DOMESTIC OIL SUBSIDIES AND
INCREASE OIL-RELATED TAXES TO IMPROVE THEIR PUBLIC FINANCES.
GDP EFFECTS
(POSITIVE)

10. THE NET EXPORTERS SUCH AS SAUDI ARABIA, RUSSIA AND
NORWAY, GDP GROWTH IS DAMPENING AS EXPORT REVENUES
ARE FALLING.
THE NEGATIVE EFFECTS ON THE ECONOMY MAY THUS BE
SIGNIFICANT FOR SEVERAL OIL-EXPORTING COUNTRIES.
GDP EFFECT
(NEGATIVE)

11. LOWER OIL PRICES LEAD TO LOWER GLOBAL INFLATION. IN THE ASSESSMENT OF
THE WORLD BANK (2015), GLOBAL INFLATION WOULD FALL BY 0.4–0.9
PERCENTAGE POINTS OVER 2015 AS A RESULT OF A FALL IN OIL PRICES OF 30 PER
CENT. HOWEVER, THE EFFECTS VARY FROM COUNTRY TO COUNTRY DEPENDING
ON FACTORS SUCH AS THE WEIGHT OIL PRODUCTS HAVE IN THE CPI BASKET, THE
EFFECTS OF THE OIL PRICE ON WAGES AND OTHER PRICES, EXCHANGE RATE
DEVELOPMENTS
EFFECTS ON INFLATION

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