World Economic Outlook
, on the aggregate growth impacts on economies around the world. In a new report on oil prices
by The Conference Board, we show that (1) the decline’s effect on consumers is largely past, (2) oil producers are still the wild card, and (3) we need to prepare for a long spell of volatility.
To be clear, there is no doubt that consumers have been the winners here. Lower prices improved their purchasing power, particularly for American consumers. European consumers have found the benefit of lower prices to be more muted because of higher taxes on gas and a strong dollar. Consumers in several emerging markets benefited less than they could have as they saw petrol subsidies removed.
Even with the windfall available, consumers haven’t been spending all of it. A survey
of German, UK, and US consumers finds that they have spent only 20-25% of their gains, while pocketing or saving about 50% for a rainy day—or a price increase.
But will prices rebound? That depends on how producers respond. The historical pattern of boom-bust cycles in the oil industry may not play out this time. While the major oil companies seem to be reacting cutting investment and slowing production, the new kid on the block—the US shale oil industry—is behaving quite differently. Shale producers have drastically cut drilling rigs by about one-third, but are also cutting costs and increasing productivity—and in some cases, are even investing in more productive rigs. So production in real terms might not come down as much as we expect.
U.S. producers see rig count decline but no significant decline in production – potential for cost savings and productivity gains are large
Source: Federal Reserve Board, Energy Information Administration, Baker Hughes
In the Middle East, Saudi Arabia (no longer the swing producer) sees a threat to its market share from both newcomers and, for example, Iran, which may be back in business if sanctions are lifted. Russia, Venezuela, and several producers in Africa lack the economic diversification to find alternative sources of income, so they may keep pumping, even for a loss. Finally, alternative energy sources, including renewable energy, are still increasing in popularity, despite their higher cost.
So, if oil prices stay low, could that give the economy another boost? Not so likely. The short-term effects from the rapid decline, would need to be translated into longer-term effects of prices that stay low. That’s a whole different thing, especially when so many other headwinds are currently reducing the strength of economies around the world. A slow global economy in the medium term makes peak oil demand a real possibility. And that demand will be met by oil that can be produced at very low prices.
The bottom line that we should prepare for volatility in oil prices for a much longer period than many might have anticipated.
The drastic decline in oil prices that began in summer 2014 has left clear winners and losers among countries, sectors, and industries. Overall, we are not as bullish as some others, such as the IMF in yesterday’s