The Strategist

How will low oil prices affect global economy?

11/29/2018 - 11:58

Just a couple of months ago, the largest market participants predicted an increase in oil to $ 100 per barrel. However, expectations did not come true, and prices dropped two times lower than the target level. What does this state of affairs mean for the global economy?

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Energy-importing countries, for example, India and South Africa, will benefit, while oil producers, such as Russia and Saudi Arabia, will experience a negative impact. Central banks, under pressure from the need to raise the key rate, will be able to breathe a sigh of relief. But at the same time, the Bank of Japan, in need of price increases, is likely to face difficulties.

In general, much depends on what will happen to the demand for oil in the face of a strong dollar and growing contradictions regarding global trade on the world stage, as well as on how the largest producers behave.

Saudi Arabia is the largest exporter of oil in the world and can have a significant impact on the supply volumes. The country has been “sandwiched” between Russia, its ally in managing production in order to maintain oil prices, and the United States, which president is interested in lowering prices.

All attention is now focused on the G20 meeting, which will be held this week. The most important question is whether Russia and Saudi Arabia will be able to reach an agreement on oil prices, which OPEC also has to approve.

How can a fall in oil prices affect global growth?

As winter approaches in the northern hemisphere, the decline in oil prices will benefit households and businesses there, reducing their costs during a period of slowing economic growth. South Africa, India and China, the world's largest importers of oil, will also benefit.

What will happen to inflation?

Lower oil prices lead to lower inflation, thereby reducing pressure on central banks to demand a higher key rate. An energy downturn could be a turning point for the Reserve Bank of India, which does not have to raise rates.

How will emerging markets cope with falling prices?

According to analysts at Capital Economics, each drop in oil prices by $ 10 per barrel accelerates the growth of the emerging markets economy by 0.5-0.7%. Nevertheless, according to analysts, this will also lead to a slowdown in GDP growth of 1.5-2% per year in the United States, Russia and Nigeria. The countries of the Persian Gulf will lose from 3 to 5% of GDP.

What will happen to the US economy?

Trump believes that falling oil prices will have the same impact as tax cuts. However, reducing US dependence on imported oil could have a negative impact on non-American industry.