1. The Rippling Effect of Declining Oil Prices on the Global Economy 2/11/2015
The Energy Informer – Robert Edgar
The steep drop in the price of oil has affected more people than just the oil producers and
gasoline consumers. The 60% drop in oil prices in the past seven months has greatly impacted
the global economy on a number of fronts. According to the IMF, a 10% drop in oil prices is
associated with roughly 0.2% positive shift in global GDP. At this current rate, the drop in oil
price on its own creates a 1.2% increase in global GDP. To put that in perspective, the 2013
global GDP growth rate was 3.2%. By that measure, the change in oil prices, on its own, would
have made up over a third of the increase in global GDP in 2013. That impact is enormous for a
commodity. Oil is the lifeblood of the world economy and this ubiquitous truth shows no signs
of changing anytime soon. The price of natural gas has also dropped—although not as
dramatically as oil—from an increase in supply from advanced drilling technologies—hydraulic
fracturing, fracking. Cheaper natural gas prices lead to lower input costs for manufacturers that
use natural gas as a feedstock. There have been mixed responses thus far on how dropping prices
would affect the global economy. Some countries are much better off than others, but
deflationary concerns have lessened some of the positives that are commonly associated with
cheaper oil.

2. The world produces roughly 90 million barrels of oil per day. A price change from $110 in June
of 2014 to $50 in January of 2015 creates a shift of wealth of nearly $2 trillion dollars from
producers to consumers. From an article in the Financial Times, Gabriel Sterne of Oxford
Economics explains, “producers have financial surpluses and don’t tend to cut back, while lower
prices redistribute income to those who have a higher propensity to consume and to invest.”
Major producing nations such as Saudi Arabia, Venezuela, and Iran use the revenues from state
oil sales and place them within either state budgets or sovereign wealth funds. These producers,
members of OPEC, and Russia are badly hurt from the 60% drop in revenues from their main
export. The currency markets have also been unkind to Russia in the wake of falling oil prices,
with a 40% drop in the rouble against the dollar. For some Africa nations, the price drop may
have positive effects in the long run. In countries like Nigeria, most of the oil money stays in the
hands of the nation’s leadership and the industry is rife with corruption. These countries should
focus on diversifying their exports and lessen their reliance on oil, as it makes up a large
percentage of their export GDP.
Though low oil prices are bad news for those exporting countries, for many others the windfall in
consumer savings from the drop will lead to faster growth and higher employment in other
sectors. For one of the fastest growing economies, India, oil makes up about a third of their
imports. Cheaper oil also mitigates inflation by keeping goods made using petroleum products
more affordable. Lower inflation leads to lower interest rates, which incentivizes investment. In
India, like many other countries, the government subsidizes the price of diesel and natural gas
(see Indonesia’s New Fuel Regime). With lower crude prices improving the margins of petrol
products sellers; these subsidies should be easier to cut. According to an article in the Economist:
fuel, fertilizer, and food subsidies make up over 14% of public sector spending in India.
Globally, the IEA (International Energy Agency) estimates the cost of subsidizing energy
consumption is $550 billion dollars a year. If even half of these subsidies are cut, that free ups
$225 billion dollars for other investment.
China is already benefiting from the descent in oil prices. China is the largest net importer of
petroleum in the world and even though their demand is decreasing from growth tapering off,
lower oil prices will increase margins in manufacturing and aid the burgeoning middle class.
China’s trade surplus reached a record high of $54.47 billion dollars in November of 2014. This
record is attributed to the drop in oil and other commodity prices. The lower price of natural gas
will also help China decrease its reliance on coal as their main power source. Natural gas emits
less than half of the carbon dioxide emissions than coal.
In China, India, and other developing nations, agriculture has reaped the benefits of the price
decline. Petroleum is the main input in fertilizer and agriculture is one of the most energy
intensive industries. Farmers use a huge amount of electricity to pump water to their crops and
lower prices is good news for developing nations. Cheaper agricultural output will lead to lower
food costs for consumers, essential in developing countries.
Europe and the Eurozone have their own problems with the threat of deflation. Low oil prices
could spell further trouble for these deflationary concerns. As stated before, lower oil prices can
hinder inflation, which is a central problem right now. Deflation discourages investment now

3. under the belief that opportunities will be cheaper in the future. On January 22, 2015, the
European Central bank announced a quantitative easing program buying 60 billion euros worth
of bonds a month. This monetary policy tool will weaken the currency by creating an influx of
money into the market and further curb inflation. The hope is that by generating more money,
there will be more investment into other sectors of the economy. Aside from this deflationary
issue, European consuming nations are benefitting in other ways from the drop in oil price. Most
of the European countries have high debt as a ratio to their GDP, and have been aided by lower
import bills.
The United States is not set to benefit quite as much from the price descent. Since the US is the
largest growing producer of crude oil, the industry has taken a beating since the second half of
2014. Larger producers have a lower cost of production and are still profiting and increasing
output. On the other hand, smaller players that are highly leveraged in shale areas are in grave
danger of defaulting.
The grass is definitely greener for consumers. The US population has benefitted from low
gasoline prices. Consumer discretionary spending is up and a research group, IHS Global Insight,
stated that the average U.S. household should have an extra $750 over the next year, compared to
the last 12 months from lower gasoline prices.
The major sentiment coming from analysts and investment firms is that the price of oil is not
going to see $100 a barrel or close to it anytime soon. Even though the price drop in oil is
spelling positives for most countries, the underlying truth is that global demand has weakened.
This weaker demand has caused overall deflationary trends that are troubling for the economy.
The current hope is that more investment spending by big oil consumers will offset these
negative trends in the long run and help to strengthen the global economy.
http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid=53&aid=1
http://www.ft.com/intl/cms/s/2/3f5e4914-8490-11e4-ba4f-
00144feabdc0.html#axzz3RNW9SYZI
http://www.eia.gov/todayinenergy/detail.cfm?id=15531
http://www.bloomberg.com/news/articles/2014-12-08/china-trade-surplus-climbs-to-record-as-
imports-drop-in-november
http://www.ft.com/intl/cms/s/0/aedf6a66-a231-11e4-bbb8-00144feab7de.html

4. http://www.economist.com/news/international/21627642-america-and-its-friends-benefit-falling-
oil-prices-its-most-strident-critics
http://www.imf.org/external/data.htm
http://www.wsj.com/articles/falling-oil-prices-spur-new-bets-on-global-economic-growth-
1418001937