The lowest oil price in four years will provide stimulus of as much as $1.1 trillion to global economies by lowering the cost of fuels and other commodities, according to Citigroup Inc.…
The global economy will rebound next year, with growth quickening to 2.98 percent, the fastest since 2010, according to analyst forecasts compiled by Bloomberg.
“A reduction in oil prices also results in a reduction in prices across commodities, starting with natural gas, but also including copper, steel, and agriculture,” Morse said yesterday in an e-mailed response to questions. “All commodities are energy intensive to one degree or another.”…
As lower energy prices help reduce commodity costs, they can push down the inflation rate. While freeing up more money for consumers, outsized declines could become a concern in places like Europe, where policy makers are trying to stave off deflation, which can exacerbate an economic slump.…
“It is a big chunk of stimulus,” Seth Kleinman, Citigroup’s head of European energy research, said by phone from London. “The macro economic analysis of higher oil prices was always that it is essentially a wealth transfer from leveraged spending U.S. consumers to saving Middle East sovereigns, so ultimately it reduces the global velocity of money significantly and it’s a net drag. Now a price fall reverses that.”Bloomberg
Citigroup Sees $1.1 Trillion Stimulus From Oil Plunge
Grant Smith and Lananh Nguyen
Will help intra non govt sector flow... as leading USD savings of external sector will probably be reduced. .. ie deficit smaller..
ReplyDeleteWill also counteract QE in this regard... as QE also reduces intra non govt flows via reduction of interest income...
Painful transition for some though... libertarian POV: F them my gas bill is going down!
On aggregate it helps more than harms probably, as the only inflation right now in the West comes from commodities. And inflation per se does not help, if it doesn't come with wage and income inflation. very few benefit from high oil prices, in the West only a few producers and the shale oil guys in USA (but honestly that's just a freaking bubble so it's not gonna last very long either + environmental damage it causes).
ReplyDeleteI agree with the original that this will be a good injection, or more correctly like a tax cut, in the West. But it has to be checked, here in Europe while oil prices fall, gasoline still is almost as pricey as taxes still very high + the price correction down the production chain takes sometime to happen and translate to consumers.
So maybe not as much stimulus as he thinks. Also one trillion (I guess that's a real decimal system billion, an amaerican trillion) is not much worldwide and in USA you have the oil industry, which was driving part of the "recovery" (sic) so fall in prices works most as a 'redistriution' of consumption capacity than a true injection (in aggregate the net 'tax cut' may not offset the lost income from oil, and considering this contributed to balancing BoP of private sector, it may or may not be good).
This comment has been removed by the author.
ReplyDeleteIt helps and it hurts. In the immediate term it reduces expenditures and investment on fossil fuels and alternative energies. We finally turned a corner and were installing more renewables than fossil fuels and were making progress on selling electric cars. Which is better in the long term to reduce imports of useless, polluting energy products. Since government deficits aren't large enough to support the purchase of useless, polluting energy products, it is better to keep the high prices and get more long-lasting renewables installed. Maybe for electricity generation, coal and gas aren't falling, so we are ok on renewables for the moment. Electric cars need to move from activist, early adopters to mainstream and this could slow that move. Electric cars are really just a shift from oil to natural gas and renewable powered transportation via electricity.
ReplyDeleteBut in all fairness, the Saudis and Europeans have existential threats at the moment, which trump short term economic considerations, so you can hardly blame them for doing whatever they think they need to with prices to survive.
Ryan agreed on everythign you say but, maybe not in USA as there (as a big oil producer and due to price and capital structure and how it works in general) you need way higher oil prices to make a move to alternative energy sources, but here in Europe lower oil won't directly translate to lower consumer prices or the changes will be marginal (if at all) unless prices stay low for a long time (which, in absence of action they will for certain as we are on the verge of depression in a big part of Europe, and recession in the other), due to lack of internal production, taxes and price structure.
ReplyDeleteI don't think it will hurt the current energy paradigm evolution, specially after the NG problems in eastern Europe due to the building 'cold war' with Russia, which if anything are even more existential threat to stability than near $100/barrel oil right now.
In the past, high oil prices have been bad for the US economy, but I'm afraid this time may be different. Here's why
ReplyDelete-- the US has become a petro state thanks to fracking. If you are a petro state, low oil prices are a bad thing. The growth in fracking has been one of the few bright spots in our otherwise anemic economy.
-- fracking is rumored to be an unsustainable bubble and this may be the thing that pops the bubble.
-- besides directly creating jobs, fracking has indirectly created jobs by reducing demand leakages. The current account deficit has shrunk to 2.3% of GDP, largely due to fracking. If the fracking bubble bursts and if domestic oil production is replaced by imported oil, the current account deficit may increase and put private accounts in the red. Sectoral balances 101.
-- the economy is already weak and it wouldn't take much of a shock to push it into recession.
-- as Steve Keen has ably demonstrated, the economy is largely driven by changes in private debt -- and there's a lot of private debt linked to fracking.
-- even if consumers do use the money saved on fuel to buy other stuff, that will simply shift aggregate demand from one sector of the economy to another sector of the economy, but not increase overall aggregate demand. I'm not seeing the stimulus effect.
In summary, think about the effect on sectoral balances and on private debt. None of us can predict the future, but it is at least conceivable that reduced domestic production and increased oil imports could increase demand leakages and/or could burst a private debt bubble.