Abstract
From a price range between 100 and 120 USD (U.S. dollars) per barrel in 2011–2014, the crude oil price fell from mid-2014 onwards, reaching a level of 26 USD per barrel in January 2016. Here we assess the economic consequences of this strong decrease in the oil price. A retrospective analysis based on data of the past 25 years sheds light on the vulnerability of oil-producing regions to the oil price volatility. Gross domestic product (GDP) and government revenues in many Gulf countries exhibit a strong dependence on oil, while more diversified economies improve resilience to oil price shocks. The lack of a sovereign wealth fund, in combination with limited oil reserves, makes parts of Sub-Saharan Africa particularly vulnerable to sustained periods of low oil prices. Next, we estimate the macroeconomic impacts of a 60% oil price drop for all regions in the world. A numerical simulation yields a global GDP increase of roughly 1% and illustrates how the regional impact on GDP relates to oil export dependence. Finally, we reflect on the broader implications (such as migration flows) of macroeconomic responses to oil prices and look ahead to the challenge of structural change in a world committed to limiting global warming.
Highlights
Making Sense of the Recent Evolution of the Crude Oil PriceCommodity prices are subject to booms and busts
The economic impact on oil importing countries is positive, while oil exporting countries are negatively affected by lower oil prices
Between mid-2014 and March 2016, the price of crude oil fell around 65%, likely caused by a combination of drivers: (i) the U.S tight oil evolution pushing up production levels, and the OPEC’s (Organization of the Petroleum Exporting Countries) lack of intention to stabilize prices; (ii) an unanticipated slowdown of economic growth in Asia; (iii) supply and demand dynamics resulting in rising levels of oil stocks; and (iv) the increase in the value of the U.S dollar compared to other currencies, making crude oil more costly for other countries
Summary
Making Sense of the Recent Evolution of the Crude Oil PriceCommodity prices are subject to booms and busts. Making Sense of the Recent Evolution of the Crude Oil Price. In the case of crude oil, this is illustrated by the steep decrease in prices between July 2014 and January 2016 (Figure 1). 26 USD/barrel (bl), the lowest price level observed in nearly 15 years. This price volatility, as well as sustained periods of low oil prices, can bring substantial challenges to those countries that strongly depend on fossil fuel production for jobs and economic growth. The objective of this study is to shed light on the vulnerability of oil-exporting regions with respect to crude oil prices. After a broad discussion of the underlying drivers of the international oil market evolution, the following section presents a backward-looking descriptive analysis into the regional economic dependence on oil production and prices. The final section provides a policy discussion and suggestions for future work
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