Academic journal article Global Economic Observer

Will Low Crude Oil Prices Cause a Global Recession?

Academic journal article Global Economic Observer

Will Low Crude Oil Prices Cause a Global Recession?

Article excerpt

1 Introduction - Reduction of crude oil prices during 2014-2016 period and its economic effects

A big decrease of oil prices (not to be confused with deflation, though apparently has the same results - falling prices) plays the role of a positive external shock in the case of net oil importing economies: the economy's capacity to produce goods and services increases, because the price of imports decreases. Falling prices of oil derivatives in an economy is not necessarily a negative phenomenon but a form of redistribution of benefits to consumers. Revenues do not decrease, consumers may invest or consume the excess revenues and the impact on real GDP is positive. When prices fall due to cheaper raw material in terms of not changing the demand curve, sales grow or production increases the economic agents using raw material employ more people. At the same time disposable income in the economy increases, and revenues of raw material manufacturer decrease. Deflation, as an economic phenomenon, is related to internal shocks on the demand side.

The steep decline of oil prices during 2014-2016 had winners and losers. In the category of winners, who have benefited from lower crude oil prices, enter in general all net importer countries - mainly the US, Japan and the Euro zone, China and, India. This has positively influenced those kinds of business that massively depend on transport or on the industrial production of these countries. China has been for almost a decade one of the largest net oil importers worldwide. Even if the Chinese economy registered a slowdown of economic growth in the last years the decline in oil prices has helped this country to increase its foreign exchange reserves. However, only a drop in oil prices is not sufficient to support the Chinese economy. In this respect it should be noted that many analysts don't question whether the growth of Chinese economy will be slow in 2016, but rather how great will be the contraction. Opinions about the state of the second largest economy in the world vary, but most of them support the idea that the government has the economy under full control.

US are both the largest producer and consumer of oil in the world. Oil price boom of the latest decade and the improvement of hydraulic fracturing technology have led to an increase in the production of shale oil. Some of the extracting oil companies have taken large loans to expand production but under the circumstances of the recent price fall, these loans are likely to become unusable or cannot be returned. Unemployment in this sector is growing, and wages are either stagnant or declining. New investment projects have been postponed. Because the US economy is much diversified, the overall impact is not alarming. The advantages are important for end users, as well as for auto and airline industries. Not all consumers have felt the drop in oil prices with the same intensity as those from US, as in the EU high taxes on auto fuels blur some of the beneficial effect of cheaper oil. However, cheaper fuel left more money for shopping in the pockets of the population and for saving in accounts, which caused a certain increase in the market value of shares of companies producing consumer goods in the importing countries, in parallel with the decline in stock prices of oil companies. As low crude oil prices led to a higher aggregate demand in the US, this in itself may stimulate economic growth. According to a monthly report from December 2015 of the International Energy Agency on the international crude oil market, last year the global demand for crude oil recorded the highest annual growth level in this century, from 1.7 mil. barrel/day to atotal of 94.5 mil. barrel/day (IEA, 2015).

In the category of losers one may include major producers and exporters of crude oil and oil services companies. Capital market analysts warn that although the US dollar seems to have benefited from lower prices of crude oil, some independent companies that extract oil from shale rocks are on the verge of bankruptcy. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.