Decline inhibitor oil prices for the global economy

1/25/2016 0:00

Translation - Khaled Qassem *
Besides collapses capital markets operations and large withdrawals of deposits from banks, oil shocks have the rare power to bring about major crises. Starting from the Arab oil embargo in 1973, people learned that sudden rises in the price of oil caused mass economic.

And vice versa, when prices are low because of a glut in 1986 as an event has provided to the world the power of good. The rule of thumb, the falling price of oil by 10 percent boosts growth in the range of 0.1 - 0.5 percentage points.

The drop in oil price

The past 18 months have seen a decline in the price of oil by 75 percent, from $ 110 a barrel to less than $ 27 this time, but the benefits are uncertain. Despite consumer gains, but the producers are suffering painfully, reaching implications to the financial markets and may detract from consumer confidence. It is possible to overtake the benefits of the oil is very cheap on the cost, but markets fell so far at high speed so that this feature is no longer evident.

Exuberance about supply

World drown oil, Saudi Arabia is pumping at full capacity since the Saudis wanted to keep the top producers of the cost of the sector, including some of shale oil companies boosted production in the United States from 5 million barrels per day in 2008 to more than 9 million barrels a day currently. Saudi Arabia is ready to bear the pain of many disability versus Iran, which recently returned to the oil market after the lifting of sanctions with the possibility of output of 3-4 million barrels daily.

Oil prices can not predict, but few experts expect not to rise before the year next.

Perhaps the current record price expected minimum, the more the price drops, the better for consuming nations and this is what we have seen in Europe and South Asia.

However, the current price grogginess also a source of concern.

The collapse of revenue may cause political instability in fragile of the world such as Venezuela and the Gulf regions, and inflame hostility in the Middle East.

And cheap oil have a positive environmental effects, has led to a decline in the world price of natural gas, which replaced the most polluting fuel source, a coal.

Global economy

But in the long term, cheap fossil fuels will reduce the incentive to work on change climate.

Even more disturbing is the new economics of oil, In the past, cheap oil stimulates the global economy because consumers are spending from each additional unit of cash in their portfolio more than those of producers. Today, it is appreciated less the simplicity of the past, oil is cheap demand also hurt in several important ways: when it exceeded the price of crude to $ 100 a barrel, it makes sense spending on oil exploration in isolated areas such as the Arctic and West Africa, under the salt rocks off the coast of Brazil depths great.

Decline in investment

But the decline in prices accompanied by declining investment and stalled projects worth $ 380 billion, falling US spending on fixed assets in the oil industry by half from its peak.

Falling oil prices lead to the emergence of many winners such as China and India, while giving oil-dependent such as Saudi Arabia and Venezuela, countries compelling reason to implement reforms, and gives the oil importers such as South Korea an opportunity to get rid of wasteful energy subsidies.

* Economist magazine