Who’s Afraid of Cheap Oil?
The Economist 《经济学人》
Print edition | Middle East and Africa
Jan 22, 2016
ALONG with bank runs and market crashes, oil shocks have rare power to set monsters loose. Starting with the Arab oil embargo of 1973, people have learnt that sudden surges in the price of oil cause economic havoc. Conversely, when the price slumps because of a glut, as in 1986, it has done the world a power of good.
In the past 18 months the price has fallen by 75%, from $110 a barrel to below $27. Yet this time the benefits are less certain. The lower the better, you might say. Look at how cheap oil has boosted importers, from Europe to South Asia. The euro area’s oil-import bill has fallen by 2% of GDP since mid-2014.
Yet the latest lurch down is also a source of anxiety. Collapsing revenues could bring political instability to fragile parts of the world, such as Venezuela and the Gulf, and fuel rivalries in the Middle East. Cheap oil has a green lining, as it drags down the global price of natural gas, which crowds out coal, a dirtier fuel. But in the long run, cheap fossil fuels reduce the incentive to act on climate change.In the past cheap oil has buoyed the world economy because consumers spend much more out of one extra dollar in their pocket than producers do. Today that reckoning is less straightforward than it was.
Cheap oil also hurts demand in more important ways. When crude was over $100 a barrel it made sense to spend on exploration in out-of-the-way provinces, such as the Arctic, west Africa.As prices have tumbled, so has investment. Projects worth $380 billion have been put on hold. In America spending on fixed assets in the oil industry has fallen by half from its peak. The fall in investment and asset prices is all the more harmful because it is so rapid. As oil collapses against the backdrop of a fragile world economy, it could trigger defaults. The possible financial spillovers are hard to assess.
Other oil producers are prone to a similar, if milder, cycle of weaker growth, a falling currency, imported inflation and tighter monetary policy. There are strains in rich countries, too. Yields on corporate high-yield bonds have jumped from about 6.5% in mid-2015 to 9.7% today. Investors’ aversion spread quickly from energy firms to all borrowers. With bears stalking equity markets, global indices are plumbing 30-month lows. Central bankers in rich countries worry that persistent low inflation will feed expectations of static or falling prices—in effect, raising real interest rates. Policymakers’ ability to respond is constrained because rates, close to zero, cannot be cut much more.
The oil-price drop creates vast numbers of winners in India and China. It gives oil-dependent economies like Saudi Arabia and Venezuela an urgent reason to embrace reform. It offers oil importers, like South Korea, a chance to tear up wasteful energy subsidies—or boost inflation and curb deficits by raising taxes. You might think that there could be no better time for a boost. In fact, the world could yet be laid low by an oil monster on the prowl.
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