Oil price slump a mixed bag for world economy

By Wang Jiamei Source:Global Times Published: 2014-11-3 17:38:31

China may find added space for policy reforms

Illustration: Lu Ting/GT

Global crude prices have taken a bearish turn over recent months, and given current market conditions the odds of a near-term rebound seem slim. Brent crude for December delivery lost 0.16 percent to close at $85.96 per barrel Friday, leaving the benchmark contract with a 9.32 percent loss, the biggest since May 2012 and marking a fourth consecutive monthly decline. Meanwhile, both Brent and West Texas Intermediate have fallen by more than 20 percent since June.

A confluence of factors have weighed down oil prices, including a strong US dollar, a global supply-demand imbalance and an increase in domestic crude output in the US, the world's largest oil consumer and importer; all of which are unlikely to change in the months to come. While falling crude prices may mean shrinking revenues for oil exporting countries and regions, they could also lead to a drop in raw material prices, a trend which could lend new economic momentum to oil importing countries and regions.

The continuous growth in oil production has been a major reason behind the recent drop in crude prices. According to data from the US Energy Information Administration, US crude oil production reached 8.4 million barrels per day during the first nine months of this year, up 14.5 percent compared with the same period last year. Meanwhile, Russia also revved up its oil output to increase fiscal revenue, with September production in the country close to the post-Soviet peak of 11.48 million barrels per day set in 1987. Moreover, the Organization of the Petroleum Exporting Countries (OPEC), which provides one-third of the world's oil, has surprisingly broken from its tried-and-true pattern of cutting production in the face of falling prices; instead the organization lifted output to 31.06 million barrels per day in September, the highest level since November 2012, according to Reuters reports.

On the other side, oil demand forecasts have been largely subdued thanks to the faltering pace of global economic recovery and the shale gas revolution in the US. Despite uncertainties surrounding shale gas development, US demand for oil has fallen noticeably over recent months. Statistics show that only 30 percent of the country's oil consumption needs were satisfied by imports, down from 60 percent in 2005.

In the meantime, the world's other top two oil consumers, Europe and China, have also recorded sluggish demand due to their own slowing economies. Because of this, OPEC and several other organizations have already lowered their expectations for global oil demand several times this year.

In addition, the strengthening US dollar has also contributed to falling oil prices. Theoretically, an appreciating greenback would hurt demand for commodities by making them more expensive for holders of other currencies. The US Federal Reserve announced Wednesday the exit of its monthly bond purchasing program, indicating rising confidence in its economic recovery, which is expected to further boost the dollar in the near future.

While views are mixed regarding how long the decline in oil prices will continue, there is no doubt that a long-term drop in crude prices would be disastrous for countries where crude production is a pillar industry. Yet, it should also be pointed out that the post-war economic recovery in the West, the rise of the economies in East Asia and most of the BRIC countries - with the obvious exception of Russia - was possible thanks in no small part to low oil prices.

Of course, a prolonged downturn in oil prices could trigger a series of crises for Russia. More than 45 percent of the Russian government's revenue comes from oil exports, which accounted for 71 percent of the country's foreign exchange earnings in 2013, totaling $371.8 billion, according to media reports. Also, this year saw Russia's foreign exchange reserves shrink by $55 billion, of which 70 percent were used to support its currency. The ruble has been facing significant downward pressure since June.

For the US, oil price slump is expected to help the country reduce production costs and stimulate economic development. Nevertheless, from another point of view, it may also put pressure on the country's shale gas industry. With the costs of shale gas production still quite high, low oil prices may discourage the development of the industry.

As for China, lower oil prices represent a major boon. Lower energy costs would ease imported inflationary pressure and give authorities more room to relax monetary policy as GDP expansion slows. Due to the concerns about inflation, Chinese policymakers have long been hesitant to roll out economic stimulus measures. Thus, recent drops in prices for commodities like oil and iron ore give the government more flexibility in terms of policymaking.

The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn


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