Tumbling Oil Prices: The Winners and Losers on The World Stage

Crude oil prices have fallen over 35 percent since the beginning of the year. However, the decline has been more dramatic since September as crude cracked by about 30 percent during this period. The reasons attributed to this crash in oil prices are, first, increased production in non-OPEC (Organization of the Petroleum Exporting Countries) countries, primarily the U.S., and second, the reluctance of OPEC to cut production.

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Crude oil prices have fallen over 35 percent since the beginning of the year. However, the decline has been more dramatic since September as crude cracked by about 30 percent during this period. The reasons attributed to this crash in oil prices are, first, increased production in non-OPEC (Organization of the Petroleum Exporting Countries) countries, primarily the U.S., and second, the reluctance of OPEC to cut production. Slowing economic activity in regions such as Europe, Japan and China is also said to be contributing to the decline.

The financial market is busy speculating whether oil prices will settle at the present level or head further south. Although how low the oil prices can go will only be known at a later date, the decline so far has different implications for different economies.

The Winners: Simply put, at the country level, falling oil prices will benefit net importers, while exporters would be worse off. However, at the aggregate level, falling oil prices is said to be a positive for the global economy. Recently, Christine Lagarde, managing director of the International Monetary Fund, said this of oil prices: "Assuming we have a 30 percent decline (in oil prices), it's likely to be an additional 0.8 percent (in economic growth) for most advanced economies, because all of them are importers of oil."

India is also benefiting from the decline in oil prices as it has accelerated the disinflationary process. Also, the subsidy burden for the government of India will decline significantly because of dropping oil prices, which will help contain fiscal deficit. Falling oil prices also helped the government decontrol diesel prices.

Furthermore, the reduction in oil prices will lower the import bill for India and have a favourable impact on its external account. A recent note from Macquarie Capital Securities India Pvt. Ltd highlighted that $10 per barrel fall in oil prices reduces the import bill and the current account deficit by $9.2 billion (0.43 percent of the gross domestic product).

The Losers: There are, however, countries where falling oil prices are having an adverse effect. For example, Venezuela is reported to be cutting government expenditure by 20 percent to contain its deficit and shore up confidence. Oil constitutes about 95 percent of exports for the country and falling prices have added complications to its existing difficult economic conditions. Inflation is rampant with widespread shortage of basic consumption goods. Similarly, Russia, which is facing economic sanctions from the western world, is in a difficult spot as an oil exporter. Its currency is in a freefall; prices are rising; and the economy is expected to slip into a recession.

 

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