The Positive Side of Low Oil Prices

In a year of plummeting oil prices and the dismay it brings to producers and traders, two senior economists at the International Monetary Fund (IMF) haven’t taken their eyes off the bright side, something that every oil customer already knows: Cheap oil can be very, very good.

In fact, they wrote in a blog on Dec. 22 that the low price of oil could increase global gross domestic product (GDP) in 2015 by between 0.3 and 0.7 percent above the Fund’s baseline world growth forecast of 3.8 percent, made in October.

The assessment was made by two of the IMF’s highest-ranking officials, Olivier Blanchard, its chief economist, and Rabah Arezki, the head of the Fund’s commodities team.

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They emphasized that their conclusions are merely a numerical simulation not a formal forecast for next year, which is handled by others at the IMF. But they also say if the Fund’s formal forecast, released in January, has similar numbers, it would mean a dramatic shift in the IMF’s outlook for the world economy.

The organization’s forecast issued in October expected drops in economic growth worldwide during 2015 by between 0.2 percentage points and 3.8 percentage points because of economic sluggishness in Brazil, Russia and the eurozone – the 18 European Union countries that have adopted the euro.

Blanchard and Arezki’s report says the lower oil prices should increase GDP in China, for example, by between 0.4 and 0.7 percentage points in 2015 above the IMF’s baseline estimate made in October. Chinese GDP growth could be even greater in 2016, up by between 0.5 and 0.9 percentage points.

Economic growth would be less in the United States, but it still would be higher, the blog says. US GDP would grow in 2015 by between 0.2 and 0.5 percentage points above the level in the October forecast, and in 2016 it could increase by between 0.3 and 0.6 percentage points.

Blanchard and Arezki’s blog acknowledges increased risk of global financial instability, yet they write that these risks are “limited,” with serious currency damage to only a few oil-exporting countries including Nigeria and Venezuela, both members of OPEC, and Russia, which is expected to fall into recession in 2015 because of both stiff Western sanctions and the plunging price of oil.

Still, Blanchard and Arezki recommend, “Given global financial linkages, these developments demand increased vigilance all around.”

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Nevertheless, the enormous drop in oil prices mean a lot, according to Holger Schmieding, the chief economist at Germany’s Berenberg Bank. He said the current low price of oil is a “game changer” that will benefit not only the developed world but also be “a big de facto tax cut” for many emerging markets.

Not so fast, says Stephen King, the chief economist at the British financial services company HSBC. King says such interpretations that lower oil prices are “like manna from heaven … may be too sanguine.” Specifically, he worries about lower prices leading to a deflationary spiral.

“Our latest projections are shrouded in even more uncertainty than is usual,” King told the Financial Times. “A plunging oil price may help to improve the split between growth and inflation for oil-importing countries but may, simultaneously, increase the risk of deflationary expectations becoming hard-wired.”

This post originally appeared on OilPrice.com.

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