Cheap oil blackens outlook for global recovery

fuel pump
A worker pumps fuel at a petrol station outside Dakar on January 17, 2016. Seyllou/AFP
Lower prices at the pump may be pleasing to American and European consumers, but the plunge in crude prices has now become a threat to the global recovery

PARIS, France (Jan. 26, 2016) — Lower prices at the pump may be pleasing to American and European consumers, putting breeze in the sails of a limp economic recovery, but the plunge in crude prices has now become a threat to the global recovery.

“We are in a situation today where there can only be bad news in the short term,” said Jean-Michel Six, chief economist for Europe, the Middle East and Africa at ratings agency Standard and Poor’s.

That pessimism is at odds with many delighted consumers, who are suddenly left with spare money in their pockets after paying less for petrol and heating oil. This has a non-negligible impact on growth.

In Germany, for example, “of growth of around 1.5% in 2015, around 4/10 of a percentage point is due to the price of oil,” said Ludovic Subran, chief economist at Euler Hermes. “It is a real rebound in consumption.”

But the past few months have been trying for countries which produce oil and other commodities, the prices of which have slumped as demand has slowed in China – the motor of global growth in recent years.

And the longer prices stay low, the more they will feel the pain as many rely on export revenue to fund social benefits.

“[…Financial] strains in many oil exporters reduce their ability to smooth the shock, entailing a sizable reduction in their domestic demand,” the International Monetary Fund said last week in its latest update to its World Economic Outlook report.

World trade hit hard

The drop in prices for oil and raw materials “is hitting world trade hard,” said Six.

World trade declined 0.1% in November from October, according to estimates from the Dutch government’s economic policy analysis unit. A less volatile measure found trade growth slowed to 0.8% in the 3 months to November from 1.7% in the 3 months to October.

The reason is simple: with less revenues, commodities producing countries have less money to import goods.

Demand from these commodity producing nations had helped support Europe and the United States after the global financial crisis in 2008, but is now shaping up to be a drag.

“The longer the oil counter-shock lasts, the more the winners and losers will diverge, whether it be in terms of countries or sectors,” said Surban.

Oil price developments have been a boon for airlines, but oil companies have been pummeled.

“In the energy sector, there could be consequences,” warned Olivier Garnier, chief economist at Societe Generale, who worries of debt problems in the industry.

Moody’s rating agency on Friday, January 22, warned it was reviewing 120 energy, metals and mining companies for downgrade.

“These reviews reflect a mix of declining prices that are near multi-year lows, weakening demand and a prolonged period of oversupply that will continue to significantly stress the credit profiles of companies in these sectors,” said Moody’s.

Worse, falling oil prices risk “destabilizing a certain number of countries” that depend on export revenues to buy social peace, said Societe Generale’s Garnier.

For Subran, countries like Algeria, Angola, Ecuador and Saudi Arabia risk very quickly “running out of political economic tools to eke out a bit of growth”.

To confront their falling revenues, producer countries do not have a choice: “more debt, more privatization or austerity,” said the chief economist at Euler Hermes.

In other words, unpopular measures “that will quickly translate into intense social pressure”.

Several Gulf nations have followed Saudi Arabia’s lead in taking the unprecedented measure of cutting hefty petrol subsidies. This has led to the somewhat paradoxical situation of rising pump prices as crude tumbles.

But a marked rebound in oil prices, however unlikely that may appear at the moment, would be “bad news” for the global economy as well, said Six.

Too brutal an increase in oil prices would “weaken buying power in Europe, and thus consumption, while the recovery remains fragile”, he said.

The risk of a quick new “oil shock” of high crude prices appears remote.

Moody’s last week revised its forecast for crude prices down to an average of $33 per barrel this year, with price to climb by $5 per barrel in both 2017 and 2018.

Crude prices dipped below $27 per barrel last week to strike a 12-year low before climbing back up above $30.


rappler_64  by Antonio Rodriguez, AFP | Rappler.com