Global Implications of Lower Oil Prices

SUMMARY

While lower oil prices can mean significant losses in revenue for some oil exporting countries, consumers should be paying less for fuel and have more money to spend. IMF’s Aasim Husain says the higher spending will be good for global growth.

 
FREE EXCERPT

  • Supply more than demand drove oil price drop
  • Lower prices likely to persist
  • Net effect on global growth is positive
  • A new paper published by IMF staff suggests that higher spending will ultimately be good for global growth.

    In an interview with IMF Survey, Aasim Husain, co-author and deputy director in the IMF’s Middle East and Central Asia Department, discusses the impact of lower oil prices on the global economy.

    IMF Survey : Have the lower prices trickled down to the general population? Are people feeling the full effect of the lower oil prices, and what is the impact of that on the economy?

    Husain: The decline in oil prices is certainly benefiting consumers, but not as much as we might have thought. Even though crude oil prices fell by about half between June of last year and by the end of the year, retail fuel prices on average globally have fallen by half as much, so by about a quarter.

    The extent to which retail prices have fallen varies a lot across countries and regions of the world. And the reason for it is that in many countries retail prices are regulated and, in fact, in many countries retail prices are fixed. So they don’t change when world oil prices change. For example, on average in Europe, the pass-through as we call it, the extent to which retail prices change in response to changes in international crude oil prices, the pass-through has been about 80 percent in Europe. In the Americas, North and South America combined and in Asia, it was about half. So the more pass-through there is, the more the consumer benefits.

    What the consumer does with this benefit, depends on what the consumer thinks, whether the decline is permanent or temporary. If it’s temporary, chances are you’re not going to alter your spending patterns very much. But if you think that this is permanent, then chances are that you will spend on other things because you’re richer effectively.

    Another thing that matters in terms of how you respond is what your initial conditions are, how indebted you are. For example, if you as a consumer are overextended, you’ve got very high debts on your credit card, on your mortgage, et cetera, when you get an unexpected increase effectively in your income, then you might use that increase to pay down some of your debt.

    IMF Survey : So what is at the root of this dramatic drop in oil over the past year? Is it really about a sudden increase in supply, or is it more about a changing consumer market?

    Husa...

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