Win­ners and losers

Enterprise - - Contents -

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

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