By Stuart Burns
In a recent market review webinar for our subscribers, we talked at some length about the impact the oil price has had on metal prices and it made me think that, in many ways, the drop in the oil price has been a bit of a disappointment.
Not that lower gas prices aren't welcome, of course they are, but the expectation was that lower oil prices would be a major boost for the global economy. Not so long ago, the International Monetary Fund calculated that every $20 per barrel fall in the oil price would increase global gross domestic product by 0.5%, rising to 1.2% if there were associated improvements in confidence.
Economists had widely predicted two effects from cheap oil. First, there would be a huge transfer of resources from oil producers to consumers, both within and between countries. And at the same time, the gains from lower oil prices would outweigh any losses from lower investment and activity in oil producing regions.
The theory went that, with their massive cash buffers, oil producers would continue social spending and infrastructure investment in spite of lower oil revenues. But maybe the extent of the fall, down almost 70% since 2014, coupled with continued anxiety about the future path of global growth has spoiled oil's party.
Low Oil and Lower Growth
As a result of this turn of events, predictions of global growth - in large part predicated on lower oil prices - have been reduced from 3.5% to 2.5%, only marginally above the level of 2%. Anything below that and global growth is considered to be on the threshold of a recession.
Certainly, the deflationary environment in many net oil-importing countries (aided and abetted by the collapse in oil prices) has encouraged consumers to save their money rather than go out and spend the windfall.
In the US, personal savings rates rose to 5.4% in February, while spending growth was a modest half of that figure. It's true to say consumers have responded to lower fuel costs by buying more SUVs and by driving further, a record 17.5 million vehicles in 2015 in the U.S. and 3.2 trillion miles, but it would seem that has limited impact in a country approaching 250 million adult consumers.
Source: Financial Times
Cheap oil is estimated to have lifted GDP by just 0.2% in the US and has probably had no more effect in Europe. Indeed, Europe has seen a deflationary environment as a result of lower oil prices actually encouraging consumers to hold off buying in the expectation prices would be lower a month later. The same effect is probably dragging on consumer spending in China, exacerbated by slowing growth and excess capacity encouraging manufacturers to slash prices as they fight for market share.
Low Oil Can't Even Help China
China has continued slowing down economically, yet it is the world's largest oil importer and second-largest consumer. China should be the big winner from the falling oil price. It spent $134 billion on crude oil imports in 2015, according to the Financial Times, down 41% compared with 2014, even as volume increased by 9%.
With costs for labor, land, electricity and water rising for Chinese factories, the oil price decline has certainly been a relief helping Chinese firms boost the trade surplus, even as fixed-asset investment - the main growth driver over the past decade - has slowed rapidly. But the benefit is hard to measure and has faced far stronger headwinds from falling investment and slowing output.
Are Consumers Used to It?
Many economists are still saying it is only a matter of time and that cheaper oil prices will eventually feed through to higher growth. That improving employment and rises in wages will encourage consumers to spend. Yet, as time goes by, consumers are becoming used to lower gas prices and less inclined to spend what may have felt like a windfall a year ago but is now the new normal.
A dramatic fall in oil prices is a sugar rush like a tax giveaway, it quite quickly passes and consumers become adjusted to the level of disposable income. In the current climate of uncertainty, it would seem oil came to the party but brought no drink. The result has been a bit of a letdown.