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Why the oil price slump hasn’t kickstarted the global economy

By in Economics, Energy on .

Why the oil price slump hasn’t kickstarted the global economy

There has only been a modest boost to global growth despite the oil price plummeting to as low as $35 a barrel. But as prices fall so the risks to producers rise

An oil pump at sunset in the desert oilfields of Sakhir, Bahrain
 An oil pump at sunset in the desert oilfields of Sakhir, Bahrain. As the low oil price endures, so the risks rise for producers. Photograph: Hasan Jamali/AP

One of the biggest economic surprises of 2015 is that the stunning drop in global oil prices did not deliver a bigger boost to global growth. Despite the collapse in prices, from over $115 a barrel in June 2014 to $45 at the end of November 2015, most macroeconomic models suggest that the impact on global growth has been less than expected – perhaps 0.5% of global GDP.

The good news is that this welcome but modest effect on growth probably will not die out in 2016. The bad news is that low prices will place even greater strains on the main oil-exporting countries.

The recent decline in oil prices is on par with the supply-driven drop in 1985-1986, when Opec members (read: Saudi Arabia) decided to reverse supply cuts to regain market share. It is also comparable to the demand-driven collapse in 2008-2009, following the global financial crisis. To the extent that demand factors drive an oil-price drop, one would not expect a major positive impact; the oil price is more of an automatic stabilizer than an exogenous force driving the global economy. Supply shocks, on the other hand, ought to have a significant positive impact.

Although parsing the 2014-2015 oil-price shock is not as straightforward as in the two previous episodes, the driving forces seem to be roughly evenly split between demand and supply factors. Certainly, a slowing China that is rebalancing toward domestic consumption has put a damper on all global commodity prices, with metal indices also falling sharply in 2015.

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