Thinking Aloud: “Cheaper Oil: Winners and Losers”

Nov. 3, 2014 by Darius 

As world oil prices fall, some countries are rejoicing, while others are panicking.  The Economist recently published an excellent breakdown of the winners and losers from the global drop in oil prices.  Here’s a summary:

Winners:

  • The global economy. It has been calculated that for every 10% change in oil prices, the global GDP adjusts 0.2% up or down.  That means the current ~25% drop in oil prices adds 0.5% to the global economy, which is not chump change.
  • China is the world’s second-largest importer of oil.  In 2013, every dollar the price of oil fell saved China $2.1 billion per year.  Cheap oil will improve Chinese standards of living and perhaps even help the Chinese environment, as it will allow the Chinese government to reduce reliance on dirtier fuels.
  • Agriculture is more energy-intense than industry, and India’s economy is dependent on agriculture.  Additionally, lower oil prices keep a damper on inflation, which is a serious problem for India.  Finally, India spends a great deal of money on energy subsidies, which are being phased out.  Thanks to cheaper oil, the public outcry is muted.

Small winners: 

  • The United States. The US is the world’s largest importer, producer, and consumer of oil.  Cheaper oil does help the US economy, but as oil imports have fallen as a share of total US oil consumption, the overall effect is mitigated.
  • Europe would benefit from low oil prices too, but deflation could become an issue.

Small losers:

  • Saudi Arabia. Oil clearly is vitally important to the Saudi budget, and falling prices likely mean that the Saudi budget is facing a deficit.  However, the Saudis are better-prepared than most (including their geopolitical rivals) to weather the lower prices: they amassed more than $700 billion in foreign currency reserves.
  • Russia is in a similar situation as Saudi Arabia: its budget requires that oil be priced higher, but Russia has accumulated major foreign currency reserves that should tide it over until prices rise again.

Losers: 

  • Venezuela’s government has a history of poor spending policies.  When the price of oil was high, Venezuela still managed to face budget difficulties.  Now that the price of oil is lower, Venezuela is facing some very serious economic problems indeed.
  • Iran needs oil to be priced at $136 per barrel to balance its budget, a far cry from the present $85.  Like Venezuela, Iran did not take advantage of high prices to create reserves.  Because of international sanctions, Iran is also finding it very difficult to borrow money.

You can find the whole article at “Cheaper Oil: Winners and Losers,” The Economist, October 25, 2014, pp.62-64  http://www.economist.com/news/international/21627642-america-and-its-friends-benefit-falling-oil-prices-its-most-strident-critics.

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One Response to Thinking Aloud: “Cheaper Oil: Winners and Losers”

  1. Rick O'Shea says:

    Cool article

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