Cheap Oil: Winners and Losers

With oil prices near to US$50 per barrel, it may be time to rethink the "new normal" and look at how cheaper oil would affect economic growth of different economies. In this note, we use Euromonitor International's macro model to explore the effects of a long term decline in the price of oil on real GDP and consumer expenditure growth for 52 countries. The scenario assumes a five year 40% decline in oil prices to US$60 per barrel starting in 2015, relative to the earlier "normal" price of around US$100 per barrel.

Table 1: Net Effects of 5 Year Decline in Oil Price to US$60/barrel on Real GDP growth

Source: Euromonitor International Macro Model

Effects on Output and Consumer Expenditure

The key beneficiaries of a longer lasting decline in oil prices are non oil producing emerging market economies, such as India or Argentina. In part this is due to their lower energy efficiency, but it also reflects the generally higher sensitivity of those countries to supply shocks (due to stronger credit constraints on businesses and households, and faster price adjustment by businesses to changes in production costs).

The US economy would see its GDP increase by 0.5% in 2015 relative to a continuation of US$100 per barrel oil price, with a five year cumulative increase in output of 0.9%. Most Western European countries would see more modest gains due to their higher fuel efficiency, despite their much stronger dependence than the US on oil imports. Oil producers would suffer significant economic contractions. For example, we estimate that Russia‘s GDP would be 6.3% lower after 5 years if the price of oil persists at US$60, relative to a world with US$100 oil.

The rankings are broadly similar for consumer expenditure, with non oil producing emerging markets gaining the most, while Western European countries see smaller increases in consumption and oil producers such as Russia suffering large declines. Effects on consumer expenditure tend to be lower, due the lower sensitivity of consumption to shocks relative to GDP.

Table 2: Net Effects of 5 Year Decline in Oil Price to 60$/barrel on Real Consumer Expenditure Growth

Source: Euromonitor International Macro Model

Why It‘s Too Early for Oil Importers to Celebrate $60 Oil (and for oil exporters to despair)

The significant positive effects that we have found for non oil producers are best seen as optimistic upper bounds  for two reasons.

First, a longer term shift to US$60 oil is still unlikely. A significant part of the recent decline is due to Saudi Arabia‘s reluctance to reduce production to boost prices. Saudi Arabia may resist restricting its oil production for 1 or 2 more years in its attempt to hurt US shale oil producers. But after that, the costs to the Saudi economy are likely to be too large to justify a continued price war (around 9.5% of GDP over 5 years according to our estimates). The foreign reserves of over US$740 billion should dampen the decline in Saudi domestic consumption,  but are unlikely to fully offset the massive hit to the value of oil exports. And spending most of its foreign reserves to reduce the impact of the current low price environment would leave Saudi Arabia vulnerable to future shocks. A more likely scenario is that oil prices would settle in at around US$75-US$85/barrel after 2015-2016. The effects of this on GDP and consumer expenditure would be roughly half of the effects of a five year decline to US$60 per barrel.

Second, a significant part of the recent oil price declines are due to lower than expected demand for oil (by some estimates more than 40% of the decline). In that case, a long term decline of oil prices to US$60 per barrel could be a signal of worse than expected recoveries from the most recent crisis and a stronger slowdown in China.

For these two reasons, our current baseline forecast is still based on the assumption that lower oil prices would have only modest effects on the global economic outlook for the next five years.

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