HOW SUSTAINABLE IS THIS OIL PRICE DECLINE?
Signs are pointing to a sustainably lowered oil price over the next year. On the supply side, US shale oil and gas production has ramped up and become the main driver of global crude production growth. While the price may temper current investment and therefore constrain future supply, near-term production should remain strong as break-even prices for most major US shale producers are at or below approximately $60/barrel, implying lowered rates of return rather than mass exits.
Operational and political disruptions in Libya, Iraq, Mexico, and Brazil are expected to ease, which should bolster production out of these countries to varying degrees. Perhaps most significant, in late November Saudi Arabia announced its intention to keep OPEC production steady at 30 million barrels per day, rather than cutting production to support a rebound in prices. This signified a shift in OPEC strategy from protecting prices to protecting market share.
On the demand side growth expectations remain muted. The IMF has not made an upward adjustment to emerging market growth – which has been the primary driver of petroleum consumption over the past decade – since April 2012. In particular, China’s transition towards consumption-led growth from investment-led, raw-materials-intensive growth should continue to reduce the country’s oil demand.
“AFTER STAYING WITHIN A ROUGHLY $80 TO $100 RANGE SINCE THE BEGINNING OF 2010 THE PRICE OF CRUDE OIL PLUMMETED OVER THE LAST QUARTER OF 2014, FALLING OVER 50%. THIS HAS AFFECTED ALL CONSUMERS IN THE WORLD WHO USE OIL FOR TRANSPORTATION, POWER, AND HOUSEHOLD PRODUCTS.”
HOW MIGHT THE OIL PRICE DROP BENEFIT CONSUMERS?
Depending on the degree of pass through to retail energy prices, consumers should benefit through cost savings on energy related consumption. Consumers’ real incomes should rise in most cases.
However, the actual changes in consumer spending will depend on several factors. First and foremost, consumers who spend more on energy (including household fuels and gasoline for transportation) should enjoy proportionately more cost savings. Second, consumers living in countries that import more petroleum than they export (net oil importers). Declining oil export revenues will pressure personal incomes in those countries that rely on oil for a large share of national income. The declining revenues will pressure government finances and therefore affect transfers or subsidies to consumers. It will also pressure external balances – and therefore currencies – offsetting the benefits from price declines to varying degrees based on the country.
Lastly, consumers may benefit from overall disinflationary pressures and possible boosts towards monetary easing from the price shock. This benefit will be felt more by emerging market consumers. Emerging economies tend to see greater pass-through effects of energy prices to core inflation. They have greater energy weights in consumer price indexes, and their monetary authorities tend to incorporate headline inflation (i.e. energy prices included) into their policy calculus.
Country Positioning: Entergy Share of Consumption, Personal Saving Rate, and Net Petroleum Rate.
ARE SOME CONSUMERS MORE LIKELY TO CHANGE THEIR BEHAVIOR?
The degree to which the price drop translates into actual increased consumption depends, in addition to the variables listed above, on the consumer’s personal saving rate (the proportion of income spent on financial assets rather than goods and services). We can expect consumers who save less to have a higher proclivity towards spending the oil cost savings than consumers with higher saving rates.
To explain variations across countries, the figure above plots countries according to the energy shares of their consumers· spending, their consumers’ personal saving rates, their net petroleum balances, and their development levels (DM/EM). We can expect countries that are net oil importers – and whose consumers have high energy shares in consumption as well as low personal saving rates – to be best positioned to increase their consumption.
Beneficial effects will be most constrained in net oil exporting countries whose consumers have relatively low energy shares in consumption and high personal saving rates. The beneficial or detrimental effects will be magnified in emerging markets, where economies are less diversified and more prone to secondary effects.
Of course, income levels and consumption shares vary within a given country as well. In the United States, the share of consumer spending on gasoline is 5.9% of total consumption for households earning less than $70,000, versus 5.0% for households earning $100,00 to $120,000 and 3.4% for households earning over $150,000. As a result, the estimated cost savings for the three groups amount to 2.0%, 1.3%, and 0.7% of after-tax disposable income for the three groups.
Since lower-earning households spend proportionately more on energy, we can expect a bigger impact on these households’ overall consumption. That being said, absolute dollar savings increase with income levels, although it begins to level off as incomes cross the $100,000 threshold.
WHAT IS THE IMPACT ON GROWTH?
We employ a macroeconomic model to help estimate the magnitudes and trajectories of different economies’ responses to the oil price shock. For our estimates, we set oil at $60 through 2015, $65 through H1 2016, and $70 through H2 2016.
Among developed economies Japan and the United States appear to be the biggest beneficiaries, with average real consumption exceeding by over 100 basis points what it might have been without the fall in oil prices. Intense energy use in both countries explains the greater benefits. Although European consumers spend a high share of consumption on energy, higher energy taxes may distort the actual share of real energy spending.
Among emerging economies real GDP growth benefits countries that are large net petroleum importers, such as India and Poland. Surprisingly Indonesia registers a negative growth rate in our model, despite the fact that Indonesia is a net oil importer. This may be because Indonesian oil exports drive growth despite the country’s overall petroleum balance.
Real Personal Consumption Growth Differences 2015 – 2016
Real GDP Growth Differences 2015 – 2016
HOW MUCH MORE CASH COULD FAMILIES ACTUALLY GET?
We estimate per capita oil savings over the coming year to average just over $560 in developed markets. Per capita oil savings are highest in the United States, Canada, and France where they exceed $650. Savings are less $500 in the United Kingdom, Japan, and Spain. Applying each country’s personal saving rate, only four countries – the United States, Canada, France, and Italy – exceed $500.
Potential Per Capita Oil Cost Savings – Developed Markets
In emerging markets we estimate five countries – South Korea, Mexico, Brazil, Malaysia, and Turkey – having per capita oil savings exceeding $100, with South Korea breaching $200 and Mexico nearing it. Another five countries – Philippines, Indonesia, China, India, and Nigeria – we estimate to have oil savings below $50.
Notably, three of the six countries with the highest absolute per capita cost savings are net oil exporters. However at 1.8% and 0.2% of GDP, respectively, Mexico and Malaysia’s net petroleum exports are relatively small. The price shock should therefore have only limited offsetting effects. Russia’s economy will be strained, however, as net oil exports represent 13.4% of GDP.