What does the price of oil mean for the world?

Whether in trading, geopolitics or economic policy-making, the price of oil has become the subject of a lot of speculation.

Earlier this week, the price of Brent crude oil fell well below $65 for the first time in five years, before rebounding to over $71 at the time of writing today (4:54 PM CET, December 3, 2014). As a consequence, commentators, politicians and policy-makers are joining in the speculating, looking for winners and losers of the oil turmoil. Here’s an overview:

Over at the Financial Times, Martin Wolf banks on the conventional view that falling oil prices are a good thing for consumers, but adds they are good for democracy as well. The lower the prices the better, he argues, because lower oil prices divert means away from what he regards as undemocratic regimes:

To the extent that [lower oil prices] reflect strong supply rather than reduced demand, they offer a welcome boost to the world economy. They also represent a welcome transfer of income from unattractive petro-despotisms.

Christine Lagarde, head of the IMF in Washington DC, also believes in the positive consequences of low oil prices, but solely for economic reasons. Steering away from the political part of Wolf’s message, she spoke about the macro-economic benefits of an oil-price fall in a conference organized by the Wall Street Journal this week.

While “there will be winners and losers, on a net basis [the falling oil price] is good news for the global economy,” she said. She believes net worldwide economic growth will be 0.8% higher next year as a consequence.

Russia Today and Arab News picked up those comments, each zooming in on the consequences for their respective readers.

Arab news noted that in her speech, Lagarde’s said that crude oil exporters “are taking a hit, for some of them it’s a calculated hit”. That reflects the idea that for countries such as Saudi Arabia, falling oil prices today are a necessary sacrifice for an OPEC-dominated supply tomorrow.

Russia Today, however, noted that according to Lagarde, the drop is a “significant threat” for oil exporting countries like Russia, which “is adding to their fragility and their vulnerability”.

On the bright side, oil producing countries might see a boost in their stock-exchange indices and non-oil exports as their currencies depreciate, according to the Moscow Times.

Markets are increasingly pricing in the likelihood of cheap oil for an extended period, causing a fundamental reassessment of Russian asset prices, analysts said […]The plunging ruble ha[s] mixed implications for Russian stock indexes, hurting the dollar-based RTS but boosting the ruble-based MICEX, a pattern that has been become familiar over recent weeks as the falling ruble takes centre stage.

Reuters guest writer Kathleen Brooks doesn’t agree with the optimists. She believes the end of the oil boom is bad for everyone, especially in the OPEC and the UK. Those same regimes Wolf describes as despotisms are supporting the financial system of countries such as the UK through investments in its banks and companies, she writes. Losing that support could potentially be catastrophic:

What no one has concentrated on is the fact that declining oil wealth, particularly in the cash-rich Middle East, could make banks in the UK more vulnerable should we get hit with another financial crisis […] Without the oil wealth of some of the Middle East’s most powerful oil producers the global financial system could lose one of its major financial backstops.

And earlier this week on our blog, UC Berkeley researcher Jérémie Cohen-Setton pointed to another group of people who are worried about falling oil prices: central bankers.

Under normal conditions, falling oil prices would be a favourable macro-economic development, but under current circumstances this is making the job harder for central bankers who struggle to deliver on their inflation targets.

But in the end, no one speculates better than speculators. Whether low oil prices help economies, politicians and policy-makers or not, someone is set to win. In a video interview, Bloomberg’s Greg Bender noted that “once the stop-order selling dried up, you have speculators and other traders stepping in to buy a deeply oversold market”.

Author: Peter Vanham, Senior Media Manager, World Economic Forum.

Image: A worker examines a pumpjack at a PetroChina oil field in Panjin, Liaoning province June 30, 2014. REUTERS/Sheng Li