Why Are Rock Bottom Oil Prices Not Fueling Greater Economic Growth?
Why Are Rock Bottom Oil Prices Not Fueling Greater Economic Growth?

Rock-bottom prices for oil, the black gold that fuels the gears of our industrial economy should—”theoretically”—lead to significant overall global growth, according to a newly released report by OPEC that covers the mammoth world oil market and the global economy. 

The Organization of the Petroleum Exporting Countries produces 29.2 million barrels of oil a day (mb/d), while the world is expected to consume 92.21 mb/d in 2015. 

Consider that markets tumbled in January to a six-year low. Prices averaged $44.38 per barrel, down by almost 60 percent since June 2014 when they were as high as $115 per barrel. That is a loss of over $2 trillion dollars a day for OPEC countries.

Russia is the largest oil-producer loser, with economic GDP growth of -2.4 percent predicted for 2015, versus an estimated 0.3 percent growth in 2014.

A recent downgrade from 7.4 percent to 7 percent in China’s expected economic growth also has a great impact on oil producers since the striving economy is a large oil importer. The weaker economic forecast in China sent oil markets tumbling, according to the OPEC report.

However, low prices should make it easier for consumption to occur and grow the economy. It has worked before. For example, between November 1985 and March 1986 prices fell by 60 percent, leading to five years of global growth at an average of close to 4 percent.

A chorus of influential economists have suggested that low oil prices will help the economy. 

The negative effects in oil producing countries appear to be offsetting their positive effects in consumer countries so far this year.

In January, European Central Bank President Mario Draghi, in announcing a round of quantitative easing (QE) for the Eurozone, referred to the “very low oil prices” as “stimulus.”

The IMF’s head Christine Lagarde, in a blog post Feb. 6, referred to the “potential  further boost [to the global economy] from recent oil price declines.”

A chart from the OPEC Monthly Oil Market Report for February. (Screenshot)
A chart from the OPEC Monthly Oil Market Report for February. (Screenshot)

Not Working

It simply hasn’t worked out positively for the global economy. In the same discussion, Lagarde said the IMF was cutting its global growth forecast by 0.3 percentage points for both years, to 3.5 percent in 2015, and to 3.7 percent in 2016. “The global economy faces significant downside risks as well,” she wrote. 

Lagarde refers to three headwinds in particular: The first is an “asynchronous monetary policy,” whereby the United States is reducing its QE stimulus and the Eurozone is increasing stimulus, adding risk for investors.

The second is the strengthening U.S. dollar, which adds burden for developing economies that have borrowed in dollars and now owe more debt.

The third is the risk of recession in Europe and Japan, a condition that would make it harder to reduce high unemployment and high debt.

As a consumer economy, the United States rises and falls on consumer growth, and OPEC notes that in general positive job creation, and rising house and equity prices have supported robust GDP growth in the second (4.6 percent) and third (5 percent) quarters, however, first estimates for the fourth quarter have growth down at 2.6 percent.

Not surprisingly, the report highlights low earnings growth within the U.S. labor market, particularly a drop in December, that will need close monitoring to see if it indicates more serious underlying challenges that would lead to reduced consumer spending.

It also notes signs of a weakening U.S. economy, including industrial production, manufacturing orders, and declining retail sales. 

Gasoline Driving Slight Growth

World demand for oil is up slightly globally, according to OPEC, with U.S. motorists driving that demand. Prices are down an average of $1.22/gal from a year earlier, to an average of $2.07/gal.

Global oil demand growth in 2015 is projected to rise by 1.17 mb/d to 0.96 mb/d, an uptick from last month’s OPEC report. That increase is led by growth in the United States of around 0.18 mb/d—a slight irony considering U.S. oil producers have suffered from the glut in market supply more than OPEC countries have, as oil production costs in the United States are higher.

Similarly, OPEC sees growth potential in China, India, and other parts of Asia, where, again gas and other transportation fuels are driving demand.

However, total OECD (a group of 34 member countries that excludes China and Russia) is still expected to contract in terms of demand, weighed down by a slack economy in Europe and the re-start of power plants in Japan that will reduce the demand for oil in the region.

Futures Markets

In the United States, oil stockpiles were at a record high in January—the highest since the government began keeping weekly records in 1982, according to OPEC.

In Europe, crude futures traded lower due to the Greece election of an anti-austerity party adding uncertainty to the Eurozone. Currencies are also under pressure in Europe due to the European Central Bank flooding the markets with over a trillion euros to avoid deflation.

However, money managers continue to bet on a rebound in oil prices, the report noted.

× close
Top