Winners and losers
In early October the IMF looked at what might happen to the world economy if conflict in Iraq caused an oil-price shock. Fighters from Islamic State (IS) were pushing into the country’s north and the fund worried about a sharp price rise, of 20% in a year. Global GDP would fall by 0.51.5%, it concluded. Equity prices in rich countries would decline by 3-7%, and inflation would be at least half a point higher.
IS is still advancing. Russia, the world’s third-biggest producer, is embroiled in Ukraine. Iraq, Syria, Nigeria and Libya, oil producers all, are in turmoil. But the price of Brent crude fell over 25% from $115 a barrel in mid-June to under $85 in mid-October, before recovering a little. Such a shift has global consequences. Who are the winners and losers?
The first winner is the world economy itself. A 10% change in the oil price is associated with around a 0.2% change in global GDP, says Tom Helbling of the IMF. A price fall normally boosts GDP by shifting resources from producers to consumers, who are more likely to spend their gains than wealthy sheikhdoms. If increased supply is the driving force, the effect is likely to be bigger—as in America, where shale gas drove prices down relative to Europe and, says the IMF, boosted manufactured exports by 6% compared with the rest of the world. But if it reflects weak demand, consumers may save the windfall.
Today’s falling prices are caused by shifts in both supply and demand. The world’s slowing economy, and stalled recoveries in Europe and Japan, are reining back the demand for oil. But there has been a big supply shock, too. Thanks largely to America, oil production since early 2013 has been running at 1m-2m barrels per day (b/d) higher than the year before. Other influences are acting as a brake on the world economy (see article). But a price cut of 25% for oil, if maintained, should mean that global GDP will be roughly 0.5% higher than it would be otherwise.
Some countries stand to gain a lot more than that average, and others, to lose out. The world produces just over 90m b/d of oil. At $115 a barrel, that is worth roughly $3.8 trillion a year; at $85, just $2.8 trillion. Any country or group that consumes more than it produces gains from the $1 trillion transfer—importers, most of all.
China is the world’s secondlargest net importer of oil. Based on 2013 figures, every $1 drop in the oil price saves it an annual $2.1 billion. The recent fall, if sustained, lowers its import bill by $60 billion, or 3%. Most of its exports are manufactured goods whose prices have not fallen. Unless weak demand changes that, its foreign currency will go further, and living standards should rise.
Cheaper oil will also help the government clean up China’s filthy air by phasing out dirty vehicle fuels, such as diesel. Lighter fuels are dearer and, under current plans, drivers could pay up to 70% of the extra; lower prices will soften that blow. More generally, says Lin Boqiang of Xiamen University, lower prices should support the government’s efforts to reduce subsidies (it has already freed some gas prices, and electricity prices are expected to follow next year).
The impact on America will be mixed because the country is simultaneously the world’s largest consumer, importer and producer