Blog Post

The oil-price slump: crisis symptom or fuel for growth?

The low oil price will benefit oil importing countries, but is also a symptom of slowing global growth. Georg Zachmann explores the reasons for the oil slump and its effects on the global economy.

By: Date: January 11, 2016 Topic: Energy & Climate

The oil price dropped to a new 11 year low at the beginning of the year. Oil price movements are the result of three factors: changes in oil supply; changes in the importance of oil in the economy and changes in the global economic climate.

Oil supply

Oil supply is outstripping expectations, as US shale oil production appears more resilient than previously thought, and countries like Iran are coming back to the market. In addition, OPEC, a cartel of oil exporters, is not managing supply.

As a result, at the end of 2015 oil production had increased by about 3 percent compared to the 2014 average, from 86 to 88.5 million barrels per day. This increasing supply puts downward pressure on oil prices.

Figure 1: Oil production in million barrels per day 2014 vs. Jan-Nov 2015 in million barrels per day.

Source: OPEC

The importance of oil in the economy

The amount of oil necessary to produce one dollar of GDP has decreased globally thanks to renewables and more efficient energy use. In addition, more GDP is now generated in the service sector, which is less energy intensive.

Energy intensity has fallen globally by 1.4% each year on average since 2000. In addition all countries agreed to move away from fossil fuels, including oil, over the course of the century at the Paris climate summit. So expect a further decoupling of oil consumption and growth. Again, reduced demand for oil causes downward pressure on prices.

Figure 2: Energy intensity of GDP at constant purchasing power parities

Global economic environment

Current aggregate demand is sluggish. Growth in emerging market economies is slowing and macroeconomic risks in developed countries persist.

The IMF revised down its global economic growth forecasts for 2015 twice, in July (from 3.5% to 3.3%), and October (from 3.3% to 3.1%). Consequently, lower than anticipated economic activity will lead to lower demand for oil and so oil prices fall.

Figure 3: IMF global GDP growth forecast 2014 vs. 2015

GZ_11_1_15_3

Oil price outlook

These developments are already largely taken into account in the currently observed low oil price. However, it is impossible to foresee price developments in 2016, as each of the drivers described above could move in any direction.

Geopolitical factors, such as growing tensions in the Middle East, could lead to higher or lower oil production. Low oil prices might stimulate a partial switch back to oil in transport and heating, but alternatively the trend for energy efficiency and renewables could accelerate the move away from oil, thanks to the Paris climate agreement. Finally, global GDP might pick up as China’s economy proves more resilient, or may fall if investors lose confidence in the Chinese economy.

Consequences of low oil prices

The second question is what the low oil price means for the economy. As for almost all economic questions, the answer is, it depends. First, it depends on whether you are an oil exporting country or not. If you are, export revenues from selling oil and hence GDP will go down (see article on the impact on oil exporters).

We observed this phenomenon in 2015 in many oil exporting countries. Several oil-exporters, such as Russia, Kazakhstan and Azerbaijan, decided to move to more flexible exchange-rate regimes, rather than exhaust their reserves defending an indefensibly overvalued currency.

The low oil price might also be a catalyst for more prudent economic policies. Some oil exporting countries started to reduce wasteful spending.  Reducing energy subsidies, as Saudi Arabia has done, is a wise step for oil exporting countries in this situation – consumers will continue to pay a similar price as oil prices are going down, and such reform benefits the stretched government finances of oil exporters.

For oil importing countries, the economic impact of low oil prices depends on the reasons for the drop in price. If the oil price falls because of an increase in oil supply, consumers have more money to spend on domestic products instead of imported oil, boosting the domestic economy.

The same is true if oil prices go down because consumers need less oil, having better alternatives. If oil prices fall because of troubles in the global economy, however, then the low oil price is more a symptom for problems than a reason to rejoice.

Consequently, some modest stimulus can be expected from low oil prices for oil importing countries. But low oil prices are also a reason to worry, as they are partly a symptom of slowing global growth.

 

The author would like to thank Marek Dabrowski and Simone Tagliapietra for useful comments.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read about event More on this topic

Past Event

Past Event

How do national energy policies fit into EU decarbonisation plans?

Through considering several different national perspectives, we discuss how to reconcile the EU Climate Strategy targets with national energy and climate policies.

Speakers: Aleksandra Gawlikowska-Fyk, Christian von Hirschhausen, Carole Mathieu and Georg Zachmann Topic: Energy & Climate Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 15, 2019
Read about event More on this topic

Upcoming Event

Jun
5
11:00

Ahead of 2020: socio-economic implications of NDCs

The event is a policy dialogue organised under the project, ‘COP21: Results and Implications for Pathways and Policies for Low Emissions European Societies’. The COP21 outcome represents an important new strategic context for EU climate policy. Analysing the implications of this new context requires an interdisciplinary approach, combining analysis of the evolution of the international […]

Speakers: Michel Colombier, Teresa Ribera, Artur Runge-Metzger, Henri Waisman and Georg Zachmann Topic: Energy & Climate Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More on this topic

Working Paper

Estimating the cost of capital for wind energy investments in Turkey

Wind power represents a key component of Turkey’s national energy strategy. Based on data collected on 138 installations in the country, this paper provides an estimation of wind power’s cost of capital in Turkey. This analysis finds that the cost of capital for wind power in Turkey compares with the one of South-east European countries. On this basis, continued governmental commitment to current support schemes for wind power must be considered as crucial to further promote wind power deployment in the country, even if the recent devaluation of the Turkish lira raises the feed-in-tariffs cost for the government.

By: Gustav Fredriksson, Simone Tagliapietra and Georg Zachmann Topic: Energy & Climate Date: May 7, 2019
Read about event More on this topic

Past Event

Past Event

A new climate strategy for the EU

At a pivotal point in time, three major EU sides come together to discuss the future climate strategy.

Speakers: Silke Karcher, Andrei Marcu, Raffaele Mauro Petriccione, Kathleen Van Brempt and Georg Zachmann Topic: Energy & Climate Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 19, 2019
Read article More on this topic More by this author

Opinion

The geopolitical implications of the global energy transition

Energy has traditionally played an important role in global geopolitics, contributing to the rise of great powers, the formation of alliances and, in many cases, also to the emergence of wars and conflicts. Every international order in modern history has been based on an energy resource. This piece discusses how the ongoing low-carbon energy transformation could reshape global geopolitics in the future.

By: Simone Tagliapietra Topic: Energy & Climate Date: March 7, 2019
Read article More by this author

Podcast

Podcast

Backstage: The next decade of European energy transition

This episode of 'The Sound of Economics' features Bruegel research fellow Simone Tagliapietra in conversation with Sir Philip Lowe and Alberto Pototschnig about the progress of the European energy transition as we prepare to enter the third decade of the 21st century.

By: The Sound of Economics Topic: Energy & Climate, European Macroeconomics & Governance Date: February 26, 2019
Read about event More on this topic

Past Event

Past Event

The European Energy Transition: A year ahead of the Twenties

This event will look at the most important issues related to energy for the next few years. The event will coincide with the launch of a book and online course on this topic.

Speakers: Klaus-Dieter Borchardt, Dirk Buschle, Alicia Carrasco, Olivier Corradi, Jos Delbeke, Rémy Garaude-Verdier, Dolf Gielen, Jean-Michel Glachant, Pascal Lamy, Philip Lowe, Susanne Nies, Alberto Pototschnig, Laurent Schmitt and Georg Zachmann Topic: Energy & Climate Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 19, 2019
Read article More on this topic More by this author

Blog Post

How the EU could transform the energy market: The case for a euro crude-oil benchmark

There is a strong case for an oil benchmark in euros. Trading energy markets in more than one currency is not unprecedented, and indeed used to be the norm. Europe – with its powerful currency and reliable regulatory environment – should stand a good chance of success.

By: Elina Ribakova Topic: Energy & Climate Date: February 13, 2019
Read about event More on this topic

Past Event

Past Event

EU-Turkey energy and climate dialogues 2019

What is the cost of capital for wind energy investments in Turkey?

Speakers: Massimo d`Eufemia, Gustav Fredriksson, Can Hakyemez, Pelin Oğuz, Canan Ozsoy, James Rizzo, Umit Sahin, Simone Tagliapietra and Mehmet Erdem Yasar Topic: Energy & Climate Location: Istanbul Policy Center, Bereketzade Mahallesi, Bankalar Cd. No:2, 34421 Beyoğlu/İstanbul, Turkey Date: January 17, 2019
Read article More by this author

Opinion

The UN climate conference in Katowice: A message from the European capital of coal

Following the COP24 climate talks in Poland, Simone Tagliapietra reviews the arguments for and challenges to decarbonisation.

By: Simone Tagliapietra Topic: Energy & Climate, Global Economics & Governance Date: December 12, 2018
Read article Download PDF More by this author

External Publication

A new strategy for EU-Turkey energy cooperation

Cooperation over energy and climate issues could be one of the components of the EU-Turkey Positive Agenda. Simone Tagliapietra proposes a new strategy for EU-Turkey energy cooperation, which envisions a shift of focus from gas and electricity to fields such as renewables and nuclear energy.

By: Simone Tagliapietra Topic: Energy & Climate, Global Economics & Governance Date: December 5, 2018
Read article More on this topic More by this author

Podcast

Podcast

Deep Focus: Renewing the clean energy strategy in the Mediterranean

In this episode of Deep Focus, Bruegel research fellow Simone Tagliapeitra explains how the nature of cross-Mediterranean energy relations needs to change, not only in line with new climate-change targets but also to meet the burgeoning energy demand outside Europe.

By: The Sound of Economics Topic: Energy & Climate Date: October 16, 2018
Load more posts