Dive, Dive, Dive! Summary of The World Bank’s Research on Falling Oil Prices

Share Button

If you don’t have enough time to read the 61 page World Bank research paper about falling oil prices, here’s a quick synopsis.

US Oil Rig Count

Major Conditions For The Decline in Prices – Rising Supply

  • OPEC’s policy objectives
  • Geopolitical risks haven’t had the expected negative effect
  • Appreciation of US dollar

Four Questions the World Bank asked about oil:

  • How does this drop in oil prices compare with previous drops?
    • 3rd largest in the last 30 years – beat by 2008 and 1985-86
    • Parallels to 1985-86
      • More supply from “unconventional oil.” That means fracking, horizontal drilling, and Canadian oil sands.
      • OPEC decided to abandon price targeting and consequently increased supply
  • What caused the sharp drop and what can we expect for prices?
    • The Perfect Storm
      • Geopolitical risk didn’t turn out to be so bad
        • Until June of last year  pressure on oil prices was off-set by other concerns like geopolitical risk
      • OPEC changed policy – OPEC accounts for 40% of global supply. Unconventional oil production started eating into their market share.  So they abandoned price targeting, which means they allowed supply to rise.
      • Rising US dollar – the effect of a stronger dollar is weaker oil demand and stronger supply from countries not using currencies linked to the US dollar.
  • What are the economic and financial consequences?
    • The result is a mixed bag.  Lower oil prices should result in stronger global demand.
    • Changes in oil prices increase uncertainty, which can reduce investment and durable goods consumption.
    • For energy-intensive sectors, lower oil prices should lead to higher profit margins, investment, and employment.
    • Typical major beneficiaries of lower oil prices:
      • Transportation industry
      • Petrochemicals
      • Agricultural sectors
      • Some manufacturing industries
    • More real disposable income for consumers.
  • What should government do about it?
    • Fall in oil prices will significantly reduce global inflation through 2015.
    • Monetary policy should react to changes in forecasted inflation.
    • The rest of this section is boring, so check it out if you want.

Energy Prices

Tags: , ,