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

Why it may be better for the economy if oil prices are high.
Why Are Rock Bottom Oil Prices Not Fueling Greater Economic Growth?
GCC Oil and Energy Ministers in the Saudi capital of Riyadh on Sept. 24, 2013. Fayez Nureldine/AFP/Getty Images
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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.