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Oil prices and the global economic picture

Hydrocarbon Engineering,

According to Andrew Sentance, PwC senior economic adviser, the unexpected nature of the oil price fall means there will be adverse impacts on oil producers, and this is already being seen in Russia. There could be other economies adversely affected, such as Venezuela, Nigeria and Middle Eastern countries. The negative consequences for these economies many show up before positive impacts are seen for oil consumers. However, net oil importers are much more significant to world GDP than net oil exporters, approximately 9 times as significant. The drop in the oil price reduces the share of world GDP that needs to be spent on oil from approximately 5% to 2.5% - if the oil price stays around US$60/bbl. This frees up a lot of potential spending on other items which could be quite a significant boost to world output.

One further point worth noting is the benefit to the core Eurozone economies, Germany, France, Italy and Spain are the largest net oil importers in Europe and therefore the biggest beneficiaries from a low oil price. That should help lift euro growth in 2015 and 2016, offsetting any short term turbulence from Russia and other oil producing economies.

The UK macroeconomic view

John Hawksworth, PwC chief economist has said that in essence, an oil price fall acts like a tax cut for the economy, but a particularly favourable one in the sense that the burden of lost revenue is primarily borne by the major oil producers such as the OPEC member countries and Russia. Of course, the UK is still a significant oil producer, but we are now a net oil importer, so there should be a net benefit to our economy as a whole, even if there are some losers in the UK oil and gas sector (and in particular places like Aberdeen).

As an illustration, in its shale oil report for February 2013, PwC estimated that a US$50 fall in oil price, if sustained, could lead to the level of UK GDP being around 3% higher in the long run. Of course, the recent fall in oil prices may not be sustained, in which case the net GDP gain would be less, but it gives some idea of potential orders of magnitude.

Benefits are certainly already being seen by UK consumers with CPI inflation coming down to just 1% in November, pushing real wage growth back into modestly positive territory for the first time in years. This should benefit the broad range of sectors that supply goods and services to consumers, who will have more money left in their pockets after paying for petrol and other items linked directly or indirectly to oil prices.

This assumes that all of most of the oil price falls are passed through to consumers, which should be the case so long as the sectors concerned are reasonably competitive (the supermarkets potentially play an important role here in the case of petrol retailing). However, this may not be guaranteed in all sectors – where markets are less competitive, companies using oil and oil related products as inputs may seek to retain some of the gains in higher margins. This could also be a rational response to uncertainty about whether the oil price falls will persist, which may make companies reluctant to cut prices quickly and then find there is customer resistance to them going back up again if and when oil prices rebound. Assessing the impacts at sector level is a complex business, with many uncertainties.

Adapted from a press release by Emma McAleavey.

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