Advertisement
Features

Oil-price slide will boost global economic growth

Since early October, the oil price has fallen by a third to a one-year low of around $60 a barrel. But plenty of people will benefit from that.

924_MW_P05_Markets-
South Africa: a beneficiary of falling oil prices

Oil is well and truly off the boil. In early October it reached a four-year peak of $86 per barrel. Since then, it has fallen by a third to a one-year low of around $60 a barrel. The 20% slide this month has put it on course for its worst month in four years.

Advertisement - Article continues below

US sanctions on Iranian oil exports have removed far less oil than expected from the global market. "Everyone was pumping oil as hard as they could because of worries about the Iran sanctions, but then there were exceptions for Iran's eight biggest customers," Cornelia Meyer of Meyer Resources, told the BBC's Today programme. The US granted waivers to allow Iran's largest oil buyers including China, India and Japan to continue importing from the Islamic Republic. "That led to excess oil in the market."

The oil cartel Opec, which produces about a third of global output, could consider cutting its output to prop up prices in a meeting on 6 December. But the group "is under pressure from President Trump to keep prices low", says Emily Gosden in The Times. US producers have increased their output recently, while estimates of global demand have fallen as growth appears to have cooled.

Advertisement - Article continues below

The oil-price retreat bodes well for US household spending, which accounts for around 70% of the economy, because consumers will enjoy lower petrol prices. Meanwhile, says Justin Lahart in The Wall Street Journal, lower prices will have a less negative impact on the US shale sector than in 2014 because production is more efficient now. The industry employs fewer people and makes up a smaller share of overall capital spending. The bottom line is that "the negative economic impact of falling oil prices is less significant than it was four years ago, while the positive aspects are just as strong".

Who else benefits?

The drop in oil prices should also benefit emerging markets that are oil importers, such as South Africa and India, says William Jackson of Capital Economics. Every $10 per barrel fall in oil prices boosts GDP by about 0.5%-0.7% in major emerging markets that import oil, such as Turkey, Korea, Chile, the Philippines and Thailand, he reckons.

The big losers are countries that export oil. Every $10 per barrel drop in the oil price could lower the economic output of the Gulf states by an annualised 3%-5% a year and the United Arab Emirates, Russia and Nigeria by 1.5%-2%.

On a global scale, the upshot should be a small net boost to growth from lower oil prices, adds Andrew Kenningham, also of Capital Economics. Households will profit from lower inflation while any decrease in investment and tightening of fiscal policy in emerging market oil producers "should be very small".

Advertisement
Advertisement

Recommended

Commodities look cheap
Commodities

Commodities look cheap

Gold may be on a bull run, but industrial commodities, including copper, zinc and aluminium, remain cheap.
17 Jan 2020
What escalating tension between Iran and the US means for oil prices
Global Economy

What escalating tension between Iran and the US means for oil prices

The tension between the US and Iran is unlikely to mean all-out war in the Middle East. But markets may be getting a little too complacent about its e…
6 Jan 2020
Rising output will keep a lid on the oil price
Oil

Rising output will keep a lid on the oil price

Oil exporters’ cartel Opec gave further encouragement to the bulls this month after agreeing to new production curbs.
20 Dec 2019
How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019

Most Popular

Don’t despair on dividends – these companies could be set to bring them back
Income investing

Don’t despair on dividends – these companies could be set to bring them back

The value of dividends paid out by UK stocks has plummeted this year as companies “rebase” their payment policies. But things could soon start to look…
6 Aug 2020
Platinum: the precious metal that looks set to play catch-up with silver and gold
Silver and other precious metals

Platinum: the precious metal that looks set to play catch-up with silver and gold

Gold and silver continue to soar, but there's still time to get in. And there's another precious metal that looks set to go on a bull run too, says Jo…
7 Aug 2020
The MoneyWeek Podcast: how to age well and profit from the “longevity dividend”
Investment strategy

The MoneyWeek Podcast: how to age well and profit from the “longevity dividend”

Merryn talks to economist and author Andrew J Scott and discusses how we can profit from the "longevity dividend" as we live longer; why we need to re…
6 Aug 2020