The sustainability of the world economy depends mostly on the demand and supply of energy. The oil industry which supplies more than sixty five per cent of world energy consumption faces major ups and downs, and currently it is in its deepest plummet since 1990s. Latest oil price is pegged at US$36 per barrel, the lowest recorded in the last eleven months. The petro-dollar economies notably Canada, Saudi Arabia, Iran, Nigeria and Russia have been hard hit by the persistent fall of oil price. Consumer countries of oil, on the other hand, are the gainers from the plunge since June 2014. However, a good deal depends on how the gains are being derived from falling prices.
While the world-wide consumers have welcomed the extra cash in their wallets due to abnormal fall of oil price, the price cataclysm of oil has also impelled some important questions: Why did the oil price go steep and suddenly dropped? How long will this trend last? And what impact will it have on the world economy?
Oil prices in the international market started to drop since the summer of 2014. Measured in US dollars, the price has fallen by approximately 50 per cent since June 2015 and 55 per cent in December 2015. The falling prices are due to a compound effect of the increased supply of oil and weakened demand. Forward pricing manifests that prices in the years ahead will not return to recent levels. Lower oil prices dampen inflation both directly when the price of oil-related products falls and indirectly when production costs for other goods fall. The effects are dissimilar for oil-producing countries and oil-importing countries. A fall in oil prices will have a greater effect if the lower prices are permanent, as companies and consumers will then change their behaviour more than they would if the fall in the prices was only temporary. The reaction of central banks' monetary policy to a fall in oil prices depends greatly on how inflation and inflation-forecasts are affected.
Lower oil prices were celebrated as an anoint for global growth. Theoretically, the movement of wealth from commodity producers -- which often stows away oil revenue in sovereign wealth funds -- to consumers is a positive step for economic activity. But strategists at Credit Suisse believe that so far, the global economy has seen only the storm from lower crude, not the rainbow that follows. "The fall in the oil price was considered by many investors to be a significant positive for global GDP growth," a team led by global equity strategist Andrew Garthwaite admitted. The net effect of this development, according to their calculations, has turned out to be a 0.2 per cent hit to the global economy.
The fall in oil prices has been one of the most important macro-economic events recently. It has certainly meant lower fuel bills for consumers in the oil importing countries, and oil importing countries always welcome fall in oil price. China, as we know, is one of the largest oil importing countries and depends on oil imports for 60 per cent of its consumption, but the benefits of falling oil prices to China have not been as extensive as expected due to the government's raising taxes on oil products. There have also been concerns about lower growth prospects and a slowdown in real estate, where a majority of household wealth is invested, and this has resulted in increased household savings. Also, one of the reasons for lower oil prices is the lower demand from China, where fears of deflation led to the central bank's reducing the amount of reserves that banks are required to hold. The Chinese government has also utilised this recent fall in oil prices to increase its strategic oil reserves. Thus, the lower prices will certainly improve China's current account surplus and lower costs for businesses, but are not likely to have much of an impact on the Chinese economy.
The fall in oil prices should lead to a momentous improvement in Japan's trade deficit, given the fact that Japan imports most of the oil it consumes. While the price dip should significantly raise corporate profits and boost household income, this has been offset to some extent by the depreciation of the yen relative to the dollar. Further, lower oil prices are likely to decrease inflation, which is likely to make the Bank of Japan's aim of 2 per cent inflation difficult to achieve. Japan's power sector, on the other hand, is likely to benefit, since it has been using oil powered plants to make up for the lost capacity due to the closure of nuclear reactors.
The case with the US seems to be more multifaceted. Though the US is the second largest importer of oil, it is also the second largest producer of oil, and there has been a significant increase in US oil production over the past 5 years mainly due to the use of new technologies such as fracking. While lower oil prices will benefit consumers in terms of increased savings that are likely to increase consumption and result in an up tick in the GDP, they are also likely to hurt U.S. oil producers in the long term -- who according to estimates, need oil prices to be above $60 to break-even. Lower oil prices will also negatively affect the profitability of US energy companies such as Exxon, Chevron etc.
Oil giant Saudi Arabia is heavily dependent on oil revenues, with almost 90 per cent of the government's revenues coming from oil. The recent fall in oil prices is likely to result in a higher government deficit and may result in lower government spending, and in the longer term, Saudi Arabia will need around US $104 billion to balance its budget. But even after the drastic fall in oil prices, the Saudis haven't cut their oil production.
Russia, on the other side, has, by far, been one of the countries most adversely affected by the plunge in oil prices. Its oil revenues, which constitute more than half of its budget revenues and approximately 70 per cent of export earnings, have dropped significantly with an estimated US $2 billion loss in revenue. Iran, a large oil exporting country, already reeling under heavy economic sanctions imposed by Western nations, reduced its oil exports by more than half. Iran depends on oil for slightly less than half of its total revenues and more than 80 per cent of its export revenues. Other oil giants like Nigeria, Brazil and Venezuela have been suffering from severe shocks from the oil price nosedive.
Many countries in Asia, Africa and Latin America control oil price in their countries, the governments being the sole importer of oil. Reports show that some countries adjust only 20 to 40 per cent, while some adjust 40 to 80 per cent. Â
Bangladesh is a country whose economy mostly depends on the performance export oriented industries like apparels, textiles and leather. These industries use oil, especially diesel, to produce electricity for the running the factories. Slight reduction in the diesel price can boost these industries by reducing the cost of production. It need not be stressed that such reduction in the production cost can help these industries compete in the stiff international market. But in Bangladesh, no price adjustment of oil (petro & diesel) took place, so far. As a result, the general people (the consumers) are deprived of the benefits of price slump. For sustainable economic growth, expansion of businesses and industries and enhancing consumer confidence, oil price adjustment is sine qua non for the Bangladesh economy. It is thus not at all understood why our policy-makers do not think in the same line. According to European Commission's forecast, EU's GDP growth is expected to rise from 1.3 in 2014 to 1.7 per cent in 2015 due to the benefits from the falling oil prices.
The writer is the CFO of a private group of industries. m.jalal.hussain@gmail.com