Just a couple of months ago, major oil trading houses were predicting the return of $100 crude. Now, with oil prices at half that level, here’s a look at what the slump means for the world economy.
Energy importers like India and South Africa will benefit; oil producers such as Russia and Saudi Arabia will hurt. Central banks under pressure to raise interest rates will get a reprieve; those looking to revive prices, such as the Bank of Japan, face another headwind.
Ultimately, much depends on how world oil demand shapes up as it gets battered by a stronger dollar and global trade spats, and how the biggest producers react.
All eyes are on the Group of 20 meeting this week to see if a consensus on output emerges between the Saudis and Russians, and if that can carry through to the OPEC gathering next week.
What does it mean for global growth?
With the northern hemisphere winter approaching, the oil-price slump will cushion households and businesses during a period of slowing economic growth. Countries that import oil and have current-account deficits, such as South Africa, will also stand to benefit. China is the world’s biggest importer of oil and is already battling a broader moderation in its economy amid a trade war with the US and domestic challenges.
What does it mean for inflation?
Lower oil prices mean less pressure on inflation and less pressure on central banks to raise interest rates. One example: Bloomberg Economics says the energy slump is a game changer for India and could mean the Reserve Bank of India shifts to a neutral outlook.
How will emerging markets handle the price drop?
Every $10-per-barrel fall in oil prices boosts incomes by about 0.5 to 0.7 percent of gross domestic product in major emerging market oil importers, Capital Economics analysts estimate. The same discount will cause a 3 percent to 5 percent loss of GDP in most of the Gulf economies, and a slowdown of 1.5 percent to 2 percent of GDP in the UAE, Russia and Nigeria, all on an annualized basis, according to the analysts.
What does it mean for the world’s biggest economy?
Trump has described the slump in oil prices as the equivalent of a tax cut. Still, diminishing American reliance on imported oil due to the emergence of shale production will erode the positive economic consequences at the industry level.