Cheap Oil Usually Means Global Growth, But This Time Seems Different

Mar 9, 2016
Originally published on March 9, 2016 8:31 pm

In the past, falling oil prices have given a boost to the world economy, but recent forecasts for global growth have been ratcheted down, even as oil prices sink lower and lower. Does that mean the link between lower oil prices and growth has weakened?

Jason Bordoff, head of the Center on Global Energy Policy at Columbia University, says there are still good reasons to believe cheap oil should heat up the world economy.

"Consumers have more money in their pockets when they're paying less at the pump," says Bordoff. "They spend that money on other things, which stimulates the economy."

Sara Johnson, director of global economic research at IHS, says the biggest gains go to countries that import most or all of their oil — China, Japan, India, South Korea, Germany and France. The United states also remains a net importer of oil, despite huge increases in U.S. production from the shale oil boom.

As the list suggests, the countries most likely to benefit have big economies and lots of consumers.

But doesn't the extra money in the pockets of those countries' consumers mean an equal loss in oil-producing countries, making the total economic effect a wash? Not necessarily, says Johnson.

Many oil producers built up huge reserve funds when prices were high, she says — so "when prices fall they will draw [on] their reserves to support government spending and subsidies for their consumers."

Bordoff says Saudi Arabia, with reserves of about $600 billion, is a good example. A vast number of Saudi paychecks come from government employment. Using that money means that, when oil prices drop, "the economy doesn't feel it as directly, day to day, in terms of people's paychecks," he says. Even when oil prices fall, Saudi consumers can keep spending.

Venezuela's Free-Fall

But not all oil producers have big reserves. In Venezuela, for instance, collapsing oil prices have sent its economy into free-fall.

"It's been ravaged with shortages of basic foodstuffs," Bordoff says. "You can't find everyday necessities, like toilet paper, on supermarket shelves."

Venezuela's inflation rate has skyrocketed to 800 percent, and the country's economic collapse is subtracting from global growth. To a lesser extent, growth in Nigeria, Russia and even in the United States is being hurt by the damage to their oil sectors.

Carl Weinberg, chief economist at High Frequency Economics, believes that the negative effects of plunging oil prices are swamping the positive effects of cheaper oil. He says the tip-off is a sharp decline in global trade, which has slumped partly because oil-producing nations can't afford to import as much as they used to.

"The value of world trade has gone down by 14 percent, year over year," says Weinberg, quoting figures from the International Monetary Fund. That's the biggest drop in the post-World War II period, except for the decline during the financial crisis of 2008, he says: "In fact we're talking about reducing world GDP growth from about 3 percent to about 1.5 percent, using the measures that the IMF uses — and that's a pretty catastrophic year."

Pressure On World Growth

IMF forecasters continue to expect global growth in the 3 percent range, but Weinberg doesn't think those numbers will hold up.

Both Jason Bordoff and Sara Johnson acknowledge that the global economic benefit from a fall in oil prices today is likely lower than it was in the past. One reason is that more countries are big oil producers now, so the nations suffering from the price drop account for a larger share of the global economy.

Also, Bordoff says consumers, in the United States at least, are acting cautiously with the windfall they're getting at the gas pump.

"We're seeing, coming out of the Great Recession, that consumers are saving a larger percentage," says Bordoff, "rather than going out and spending it."

And a number of oil producing countries, including Saudi Arabia, are trimming their gasoline subsidies and raising taxes, Bordoff says, so the net savings for global consumers is not as big as the oil price plunge might suggest.

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Transcript

DAVID GREENE, HOST:

Doesn't this feel like a time when a lot of assumptions have been proven dead wrong? Well, here's another one. Falling oil prices usually help the global economy, but not this time. Here's NPR's John Ydstie.

JOHN YDSTIE, BYLINE: Jason Bordoff heads the Center on Global Energy Policy at Columbia University. He says there are good reasons to believe that lower oil prices should boost global growth.

JASON BORDOFF: Consumers have more money in their pocket when they're paying less at the pump and they spend that money on other things, which stimulates the economy.

YDSTIE: The biggest gains go to the countries that import most or all of their oil, says Sara Johnson, Director of global economic research at IHS.

SARA JOHNSON: Major net importers would be China, Japan, India, South Korea, Germany, France.

YDSTIE: Countries with big economies and lots of consumers. But, wait a minute. The extra money in consumers' pockets means less money in the pockets of oil producers. So shouldn't the economic effects be a wash? Not necessarily, says Johnson. That's because many oil producers built up huge reserve funds when prices were high.

JOHNSON: And when prices fall, they will draw into their reserves to support government spending and subsidies for their consumers.

YDSTIE: Think Saudi Arabia, says Jason Bordoff, which has reserves totaling around $600 billion.

BORDOFF: So the economy doesn't feel it as directly day to day in terms of people's paychecks, which are very heavily dependent on government employment.

YDSTIE: So even though oil prices fall, Saudi consumers can keep spending. But not all oil producers have big reserves. Take Venezuela, says Bordoff. Collapsing oil prices have sent its economy into freefall.

BORDOFF: It's been ravaged with shortages of basic foodstuffs. You can't find everyday necessities like toilet paper on the supermarket shelves. Inflation is 800 percent.

YDSTIE: That's subtracting from global growth. And growth in Nigeria, Russia and even the U.S. is being hurt by the damage to their oil sectors. Carl Weinberg, chief economist at High Frequency Economics, believes that the negative effects of plunging oil prices may more than offset the positive effects. Weinberg says the tipoff is a sharp decline in global trade partly because oil-producing nations can't afford to import as much as they used to.

CARL WEINBERG: The value of world trade has gone down by 14 percent year over year in some of the latest figures published by the IMF.

YDSTIE: That's the biggest drop in the post-World War II period except for the decline during the financial crisis of 2008.

WEINBERG: In fact, we're talking about reducing world GDP growth from about 3 percent to about 1.5 percent using the measures that the IMF uses, and that's a pretty catastrophic year.

YDSTIE: Now, the IMF continues to pay global growth in the 3 percent range, but Weinberg doesn't think those numbers will hold up. Both Jason Bordoff and Sarah Johnson acknowledge that global economic benefit from a fall in oil prices today is likely lower than it was in the past. One reason is that more countries are large oil producers now. Also, Bordoff says, consumers - in the U.S., at least - aren't spending as much of their windfall.

BORDOFF: We're seeing coming out of the Great Recession that consumers are saving a larger percentage of what they're saving at the gasoline pump rather than going out and spending it.

YDSTIE: And he says a number of oil-producing countries, including Saudi Arabia, are trimming their gasoline subsidies or raising taxes so the windfall to consumers is not as big as the oil price plunge might suggest. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.