January 20, 2016
World financial markets appear to be in a panic, partly over events in China, and partly over the plunge in oil prices. I will claim no expertise on the former, although people I respect who do write on China seem to think the country is not facing an economic meltdown.
This leaves lower oil prices as the main source of worry. There are some bad stories with lower oil prices. Developing countries that are heavily dependent on oil exports will be badly hit. Also, much of the debt issued by energy companies is likely to go bad. This may have some ripple effects in the financial markets, but is unlikely to set off any general collapses. Also, the energy sectors in the U.S., Canada, and a few other wealthy countries will be badly hurt.
But it is important to remember that lower oil prices also have an upside. Many countries are big net importers of oil. For them, the plunge in prices will free up large amounts of money for other goods and services.
Just to take a few prominent ones, France imports 470 million barrels of oil a year. If we envision average savings of $50 a barrel from the prices of two years ago, that comes to $23.5 billion in freed up money, and amount equal to 0.8 percent of GDP. (That would come to around $150 billion a year in the United States.) Turkey imports 124 million barrels a year, which would imply savings of $6.2 billion a year, or a bit less than 0.8 percent of GDP. Greece imports just under 150 million barrels a year, which would mean savings of $7.5 billion annually or more than 3.0 percent of GDP (equal to $540 billion a year in the U.S.).
These countries, and other big oil importers, should be seeing a spur to growth from the drop in oil prices as more money is ending up in consumers’ pockets. Any discussion of the impact of plunging oil prices on the world economy has to include these positive effects. (Of course the spur to fossil fuel consumption is horrible for the environment.)
Comments