World — Oil price crash unlikely to boost global economy
Global oil prices suffered their biggest one-day fall since the 1991 Gulf War this month, breaching US$25/bbl to reach an 18-year low. The crash reflected Saudi Arabia’s decision to boost output following the collapse of the OPEC+ alliance, despite the rapidly deteriorating outlook for global demand caused by the COVID-19 pandemic. Indeed, the International Energy Agency now forecasts oil demand to fall in 2020—the first annual decline in over a decade—given the deep contraction in China, which accounted for 80% of global oil demand growth last year, and major disruptions to travel and trade.
To the extent that Saudi Arabia continues to ramp up oil production in the face of collapsing demand, prices will stay low. Sustained falls in oil prices have historically benefited the world economy, boosting consumer demand and investment in non-oil sectors. Lower energy costs will likely soften the economic impact of coronavirus for consumers and large oil importers such as China and India, but they are unlikely to translate into higher spending until consumer sentiment and transport demand recovers. Further, the positive supply shock may damage the global economy via two main channels.
- Financial pressure that sharply reduces petro-economies’ GDP growth and oil and gas investment worldwide. IMF estimates of fiscal breakeven rates suggest current oil prices are insufficient for governments to finance spending plans while balancing the budget (Chart).
- Stress in credit markets. In particular, defaults by energy-related companies in high-yield bond markets could exacerbate the recent tightening in global financial conditions. Sharp oil price falls often come with global risk aversion and higher borrowing costs.
