EFFECTS OF THE FALLING

PRICE ON THE GLOBAL

ECONOMY

THE FALLING IN THE OIL PRICES ARE LARGELY DEEMED TO BE AN

EFFECT OF THE INCREASE SUPPLY OF OIL

LOWER OIL PRICES DAMPENS INFLATION BOTH DIRECTLY WHEN THE

PRICE OF OIL RELATED PRODUCT FALLS AND INDIRECTLY WHEN

PRODUCTION COSTS FOR OTHER GOODS FALL

A FALL IN OIL PRICES WILL HAVE A GREATER EFFECT, IF THE LOWER

PRICES ARE PERMANENT AS COMPANIES AND CONSUMERS WILL THEN

CHANGE THEIR BEHAVIOR MORE THAN THEY WOULD IF THE FALL IN

THE PRICES WAS ONLY TEMPORARY

KEY POINTS

THE PRICE FELL FROM 115 US DOLLARS PER BARREL TO 60 DOLLARS

PER BARREL THUS FALLING BY 50%, THIS IS THE SECOND LARGEST

FALL OVER A 12 MONTH PERIOD IN THE LAST 50 YEARS

HE LARGEST FALL OCCURRED IN CONJUNCTION WITH THE

FINANCIAL CRISIS OF 2008–2009, WHEN DEMAND IN THE GLOBAL

ECONOMY FELL RAPIDLY. THIS TIME, THE PRICE DECREASE IS LARGELY

DEEMED TO BE AN EFFECT OF THE INCREASED GLOBAL SUPPLY OF OIL

THE PRODUCTION OF NORTH AMERICAN SHALE OIL HAS INCREASED

SHARPLY IN RECENT YEARS. THIS LIES BEHIND THE HEAVY INCREASE

OF TOTAL OIL PRODUCTION IN THE UNITED STATES AND CANADA.

FALLING OIL PRICE SINCE SUMMER

THE OIL CARTEL OPEC HAS NOT DECREASED PRODUCTION TO

MAINTAIN PRICES. INSTEAD , OPEC HAS ALSO INCREASED

PRODUCTION.

AN EXPECTED DECREASE IN DEMAND FOR OIL DUE TO LOWERED

EXPECTATIONS FOR GLOBAL GDP GROWTH HAS ALSO CONTRIBUTED

TO THE PRICE FALL.

GDP GROWTH IN CHINA HAS FALLEN AND IS WEAK IN EUROPE.

NEVERTHELESS, THE INCREASE IN SUPPLY IS DEEMED TO EXPLAIN THE

GREATER PART OF THE PRICE FALL, AND THIS CONCLUSION IS SHARED

BY MOST STUDIES.

ACCORDING TO AREZKI AND BLANCHARD (2014)26, 65–80 PER CENT OF

THE FALL IN OIL PRICES UNTIL DECEMBER LAST YEAR CAN BE

EXPLAINED BY INCREASED SUPPLY

IF OPEC REDUCES OIL PRODUCTION, THE PRICE OF OIL WILL

PROBABLY RISE.

A LOW OIL PRICE WOULD PROBABLY ALSO LEAD TO LOWER

INVESTMENTS IN OIL PRODUCTION, INCLUDING NORTH

AMERICAN SHALE OIL PRODUCTION, WHICH WOULD, IN TURN,

REDUCE PRODUCTION CAPACITY AND THUS THE SUPPLY OF

OIL.

OTHER FACTORS THAT COULD INFLUENCE THE PRICE OF OIL

VIA REDUCED SUPPLY ARE THE GEOPOLITICAL TURBULENCE

IN LIBYA AND IRAQ, FOR EXAMPLE, AND UNCERTAINTY LINKED

TO THE CONFLICT BETWEEN RUSSIA AND UKRAINE.

IS THE LOW OIL PRICE HERE TO STAY?

IF THE LOW OIL PRICE IS EXPECTED TO BE LONG-LASTING, THE ECONOMY WILL BE

AFFECTED MORE STRONGLY THAN IF THE PRICE DECREASE IS EXPECTED TO BE

TEMPORARY, AS COMPANIES AND CONSUMERS REACT MORE STRONGLY TO A

PERMANENTLY LOWER OIL PRICE. BUT THE EFFECT OF THE LOWER OIL PRICE ON

THE DEVELOPMENT OF THE GLOBAL ECONOMY DEPENDS NOT ONLY ON WHETHER

THE LOW PRICE IS EXPECTED TO BE TEMPORARY OR PERSISTENT BUT ALSO ON

THE CAUSES OF THE OIL PRICE FALL. A PRICE FALL DUE TO REDUCED DEMAND FOR

OIL WILL NOT HAVE THE SAME EFFECTS ON THE GLOBAL ECONOMY AS A PRICE

FALL DUE TO AN INCREASED SUPPLY OF OIL.

EFFECTS OF THE LOWER OIL PRICE ON THE

GLOBAL ECONOMY

IN OIL-IMPORTING COUNTRIES, THE EFFECT OF FALLING OIL PRICES ON

GDP GROWTH IS OVERWHELMINGLY POSITIVE. HOUSEHOLDS' SCOPE

FOR CONSUMPTION INCREASES AND COMPANIES' PRODUCTION AND

TRANSPORTATION COSTS DECREASE, WHICH NORMALLY LEADS TO

HIGHER PROFITS, INVESTMENTS AND NEW RECRUITMENTS.

CHINA, INDIA AND INDONESIA HAVE MORE ENERGY-INTENSIVE

ECONOMIES THAN DEVELOPED ECONOMIES AND THEREFORE GAIN

GREATER BENEFITS FROM LOWER OIL PRICES. SOME COUNTRIES,

SUCH AS INDIA AND CHINA, HAVE ALREADY TAKEN ADVANTAGE OF THE

LOWER OIL PRICES TO REDUCE THEIR DOMESTIC OIL SUBSIDIES AND

INCREASE OIL-RELATED TAXES TO IMPROVE THEIR PUBLIC FINANCES.

GDP EFFECTS

(POSITIVE)

THE NET EXPORTERS SUCH AS SAUDI ARABIA, RUSSIA AND

NORWAY, GDP GROWTH IS DAMPENING AS EXPORT REVENUES

ARE FALLING.

THE NEGATIVE EFFECTS ON THE ECONOMY MAY THUS BE

SIGNIFICANT FOR SEVERAL OIL-EXPORTING COUNTRIES.

GDP EFFECT

(NEGATIVE)

LOWER OIL PRICES LEAD TO LOWER GLOBAL INFLATION. IN THE ASSESSMENT OF

THE WORLD BANK (2015), GLOBAL INFLATION WOULD FALL BY 0.4–0.9

PERCENTAGE POINTS OVER 2015 AS A RESULT OF A FALL IN OIL PRICES OF 30 PER

CENT. HOWEVER, THE EFFECTS VARY FROM COUNTRY TO COUNTRY DEPENDING

ON FACTORS SUCH AS THE WEIGHT OIL PRODUCTS HAVE IN THE CPI BASKET, THE

EFFECTS OF THE OIL PRICE ON WAGES AND OTHER PRICES, EXCHANGE RATE

DEVELOPMENTS

EFFECTS ON INFLATION

THANK YOU