Publication - Global implications of low oil prices
This box looks at the impact on global activity of the oil price declines during the last two years. Oil prices have fallen sharply since mid-2014 and reached a tenyear low in early 2016. From their peak in June 2014 to the trough in January 2016, Brent crude oil prices dropped by USD 82 per barrel (70%).
Since then, they have recovered modestly by around USD 17 per barrel and, based on oil futures contracts, are expected to rise only gradually in the medium term.
The drivers of the recent oil price decline have changed over time. While most of the oil price decline in 2014 could be explained by the significant increase in the supply of oil, more recently the lower price has reflected weaker global demand.
On the supply side, significant investment and technological innovations – particularly in shale oil extraction – caused oil production to surge at a time of weakening growth, particularly in energy-intensive emerging market economies, putting downward pressure on oil prices. Meanwhile, OPEC’s decision in November 2014 to keep production quotas unchanged intensified the downward pressures on oil prices amid rising oil inventories. More recently, however, concerns have arisen that weaker global growth has been the main driver of the oil price falls.
The changing nature of the oil price shock has different implications for the global economy. In early 2015 the largely supply-driven fall in oil prices was expected to have a significant net positive impact on global activity, mainly via two channels: (i) income redistribution from oil-producing to oil-consuming countries, which were expected to have a larger marginal propensity to spend; and (ii) profitability gains from lower energy-input costs, which could stimulate investment and thus total supply in net oil-importing countries.
However, a more demand-driven oil price fall since the second half of 2015 suggests a less positive impact on the global economy. Although the low oil price may still support domestic demand through rising real incomes in net oil-importing countries, it would not necessarily offset the broader effects of weaker global demand.
Model estimates underscore how the impact on the global economy depends on the underlying nature of the shock. Simulations1 suggest that a 10% decline in oil prices that is entirely supply driven increases world GDP by between 0.1% and 0.2%, whereas a 10% decline in oil prices that is entirely demand driven is typically associated with a decrease in world GDP of more than 0.2%.
Assuming that, for example, 60% of the oil price decline since mid-2014 has been supply driven and the remainder demand driven, the models suggest that the combined impact of these two shocks on world activity would be close to zero (or even slightly negative).
page source http://www.ecb.europa.eu/
