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Cheap Oil Usually Means Global Growth, But This Time Seems Different

A motorcyclist waits Feb. 17 to buy gas in Caracas, Venezuela. President Nicolas Maduro increased the price of gasoline for the first time in 20 years, as he faced growing pressure to ease an economic crisis in the oil-producing country.
Juan Barreto
AFP/Getty Images
A motorcyclist waits Feb. 17 to buy gas in Caracas, Venezuela. President Nicolas Maduro increased the price of gasoline for the first time in 20 years, as he faced growing pressure to ease an economic crisis in the oil-producing country.

In the past, falling oil prices have given a boost to the world economy, but recent forecasts for global growth have been ratcheted down, even as oil prices sink lower and lower. Does that mean the link between lower oil prices and growth has weakened?

Jason Bordoff, head of the Center on Global Energy Policy at Columbia University, says there are still good reasons to believe cheap oil should heat up the world economy.

"Consumers have more money in their pockets when they're paying less at the pump," says Bordoff. "They spend that money on other things, which stimulates the economy."

Sara Johnson, director of global economic research at IHS, says the biggest gains go to countries that import most or all of their oil — China, Japan, India, South Korea, Germany and France. The United states also remains a net importer of oil, despite huge increases in U.S. production from the shale oil boom.

As the list suggests, the countries most likely to benefit have big economies and lots of consumers.

But doesn't the extra money in the pockets of those countries' consumers mean an equal loss in oil-producing countries, making the total economic effect a wash? Not necessarily, says Johnson.

Many oil producers built up huge reserve funds when prices were high, she says — so "when prices fall they will draw [on] their reserves to support government spending and subsidies for their consumers."

Bordoff says Saudi Arabia, with reserves of about $600 billion, is a good example. A vast number of Saudi paychecks come from government employment. Using that money means that, when oil prices drop, "the economy doesn't feel it as directly, day to day, in terms of people's paychecks," he says. Even when oil prices fall, Saudi consumers can keep spending.

Venezuela's Free-Fall

But not all oil producers have big reserves. In Venezuela, for instance, collapsing oil prices have sent its economy into free-fall.

"It's been ravaged with shortages of basic foodstuffs," Bordoff says. "You can't find everyday necessities, like toilet paper, on supermarket shelves."

Venezuela's inflation rate has skyrocketed to 800 percent, and the country's economic collapse is subtracting from global growth. To a lesser extent, growth in Nigeria, Russia and even in the United States is being hurt by the damage to their oil sectors.

Carl Weinberg, chief economist at High Frequency Economics, believes that the negative effects of plunging oil prices are swamping the positive effects of cheaper oil. He says the tip-off is a sharp decline in global trade, which has slumped partly because oil-producing nations can't afford to import as much as they used to.

"The value of world trade has gone down by 14 percent, year over year," says Weinberg, quoting figures from the International Monetary Fund. That's the biggest drop in the post-World War II period, except for the decline during the financial crisis of 2008, he says: "In fact we're talking about reducing world GDP growth from about 3 percent to about 1.5 percent, using the measures that the IMF uses — and that's a pretty catastrophic year."

Pressure On World Growth

IMF forecasters continue to expect global growth in the 3 percent range, but Weinberg doesn't think those numbers will hold up.

Both Jason Bordoff and Sara Johnson acknowledge that the global economic benefit from a fall in oil prices today is likely lower than it was in the past. One reason is that more countries are big oil producers now, so the nations suffering from the price drop account for a larger share of the global economy.

Also, Bordoff says consumers, in the United States at least, are acting cautiously with the windfall they're getting at the gas pump.

"We're seeing, coming out of the Great Recession, that consumers are saving a larger percentage," says Bordoff, "rather than going out and spending it."

And a number of oil producing countries, including Saudi Arabia, are trimming their gasoline subsidies and raising taxes, Bordoff says, so the net savings for global consumers is not as big as the oil price plunge might suggest.

Copyright 2021 NPR. To see more, visit https://www.npr.org.

John Ydstie has covered the economy, Wall Street, and the Federal Reserve at NPR for nearly three decades. Over the years, NPR has also employed Ydstie's reporting skills to cover major stories like the aftermath of Sept. 11, Hurricane Katrina, the Jack Abramoff lobbying scandal, and the implementation of the Affordable Care Act. He was a lead reporter in NPR's coverage of the global financial crisis and the Great Recession, as well as the network's coverage of President Trump's economic policies. Ydstie has also been a guest host on the NPR news programs Morning Edition, All Things Considered, and Weekend Edition. Ydstie stepped back from full-time reporting in late 2018, but plans to continue to contribute to NPR through part-time assignments and work on special projects.
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