Oil Prices and Global Growth: Greasing the Wheels--or Gunking up the Works?

After Big Plunge, New Report Reveals Diverse Economic Impacts and a Multiverse of Possible Futures for Energy Markets and the World Economy

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Apr 15, 2015, 07:15 ET

NEW YORK, April 15, 2015 /PRNewswire/ -- The drastic decline in oil prices that began in the summer of 2014 has already left its imprint on the world's economic landscape, and some of the effects may be long-lasting. Even as overall global growth stands relatively unchanged, differential effects on net importers and exporters of oil have subtly shifted the balance of economic strength among global economies. According to a new report released today by The Conference Board, a much more dramatic and permanent sifting-out of winners and losers is possible in the years ahead if continued oil-price volatility creates major adjustments in production levels and energy composition.

Getting a Handle on Energy: Global Growth Scenarios in Times of Changing Oil Prices examines where major economies stand today after months of depressed prices and how the growth outlook varies depending on the movement of prices in the next six months.

"The impact of the price decline on the global economy has been muted so far," said Bart van Ark, The Conference Board Chief Economist and a co-author of the report. "Economies that are net-importers of oil benefited modestly in terms of faster growth, but the most positive effects have probably already played out. For the next six months, much will depend on whether there will be any significant reduction in production of oil, which seems highly questionable at this point."

The report also maps out four potential trajectories of prices and production that could take place in the years ahead, and the implications of each scenario on global growth.

"As the last year has shown us, predicting oil prices—whether three months or three years ahead—is closer to a fool's errand than an exact science," said Wim Overmeer, Senior Fellow at The Conference Board and the other co-author of the report. "Instead of a single crystal ball, Getting a Handle on Energy offers a set of alternative scenarios which together illustrate the many and multifarious impacts oil prices can have on the overall business environment. Resilient firms and governments will be ones that prepare for a full multiverse of potential outlooks."

Surveying the Scene

According to the report, the immediate growth impact of lower oil prices has already largely played out in the world's economies. Among the key trends since volatility entered the market last summer:

In the developed economies, consumers have benefited substantially from lower oil prices, with a jump in real personal disposable income growth. The impact on business is much less modest, as only 20 to 50 percent of the oil-related windfall has been spent on consumption.
In the United States, oil prices delivered a modest bump in GDP growth of 0.4 percentage points between the third quarter of 2014 and first quarter of 2015. Even if crude prices fall further, however, additional acceleration is likely to be minimal. With important regional exceptions, lower oil prices have also been a net positive for the U.S. labor market.
With both the euro and the overall macroeconomic situation weaker, Europe is seeing some tailwinds from oil prices, but the effect on growth will be slower than in the U.S.
Thus far, cheap oil has been a wash for GDP growth in China, as the government has taken advantage of the opportunity to raise exceptionally low gasoline taxes.
In energy-exporting Canada, overall GDP growth is likely to be down about 0.4 points by the end of 2015 compared to an economy with oil at $100 per barrel. However, regional differences will be substantial, with many provinces likely to see a net benefit from trade with a boosted U.S. economy.
Undiversified economies dominated by energy exports—such as Venezuela and, above all, Russia—have been hit hardest by sinking prices. On their own, low oil prices will likely account for a 2.5-point decline in Russian GDP, compounding the impact of Western sanctions and general economic malaise.
Companies that depend on the energy market should plan for further volatility by testing their strategies against all plausible scenarios (see below).

Looking Ahead: Four Potential Directions

Based on the authors' analysis of current conditions and historical precedents, Getting a Handle on Energy lays out four possible directions crude oil prices could head by the end of 2017:

Stabilization at a lowered price level, between $50 to $65 per barrel (pb). This scenario would boost both consumer spending in mature oil-importing economies and government spending in emerging oil-importing countries like China and India. The result is steadied global growth, curtailed somewhat by cutbacks among oil exporters.
Further collapse of prices, to under $40 pb. This scenario is likely if governments and energy companies continue to maximize production against a backdrop of weak overall growth. Emerging regional instability would result, spreading from major oil producers—Venezuela, Russia, Nigeria, Iran, Iraq, Brazil, Mexico—to neighboring countries and largely offsetting the global growth benefits of cut-rate crude.
Recovery of prices, to over $75 pb. This scenario reflects higher-than-expected global growth and oil demand, alongside deeper cutbacks in production. The result is "Back to the Future": today's low prices would become a one-time stimulus for oil-importing countries and a shift to tighter oil, such as U.S. shale, will be back in full swing.
Boom to over $110 pb, then bust to under $60 pb. This scenario reflects excessive cuts in production. Continuing global volatility would result, as initial high prices driven by low supply eventually choke off global economic growth, causing demand to collapse.

For complete details: https://www.conference-board.org/energy-and-global-growth

Report: Getting a Handle on Energy: Global Growth Scenarios in Times of Changing Oil Prices
(Research Report R-1578-15)
By Bart van Ark and Willem Overmeer, with Charles Mitchell

About the Conference Board
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