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Page added on December 22, 2014

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Oil price drop to persist, help global growth

The recent drop in oil prices should persist, helping to boost global economic activity by up to 0.7 percentage points next year, two senior IMF economists wrote in a blog on Monday.

Brent prices have fallen more than 46 percent since the year’s peak in June of above $115 per barrel, sped up by the November decision of the Organization of Petroleum Exporting Countries (OPEC) not to reduce production.

Saudi Arabia has also convinced its fellow OPEC members it is not in the group’s interest to cut oil output, however far prices may fall, the kingdom’s oil minister said.

Oil futures are down over 20 percent since the start of the month, a drop that, if sustained, would be the biggest monthly loss in four years, further evidence lower prices should persist.

The IMF economists said 65 to 80 percent of the price decline owed to supply factors, including an unexpectedly quick return to Libya’s oil production and Iraq’s steady supply.

But they said both supply and demand remain uncertain as it’s unclear what is motivating Saudi Arabia’s supply decisions and how lower oil prices could affect oil production investment.

Falling oil prices also have raised risks to financial stability, affecting banks with claims on the energy sector and the currencies of oil-importing countries. The IMF warned volatility in prices and exchange rates could prompt global risk aversion.

“Currency pressures have so far been limited to a handful of oil exporting countries such as Russia, Nigeria, and Venezuela,” the economists wrote. “Given global financial linkages, these developments demand increased vigilance all around.”

“Overall, we see this as a shot in the arm for the global economy,” Olivier Blanchard, the IMF’s chief economist, and Rabah Arezki, head of the commodities research team, said in the blog.

The boost to the global economy would be between 0.3 and 0.7 percentage points above the Fund’s baseline world growth forecast of 3.8 percent from October.

Lower oil prices should boost China’s gross domestic product growth by 0.4 to 0.7 percentage points above the Fund’s 7.1 percent baseline estimate, assuming steady policies. In 2016, it could mean an extra 0.5 to 0.9 percentage points of growth.

For the United States, the GDP boost would be 0.2 to 0.5 percentage points above the Fund’s baseline estimate of 3.1 percent for 2015. In 2016, it could add 0.3 to 0.6 percentage points to growth.

The IMF economists said 65 to 80 percent of the price decline owed to supply factors, including an unexpectedly quick return to Libya’s oil production and Iraq’s steady supply.

But they said both supply and demand remain uncertain as it’s unclear what is motivating Saudi Arabia’s supply decisions and how lower oil prices could affect oil production investment.

Falling oil prices also have raised risks to financial stability, affecting banks with claims on the energy sector and the currencies of oil-importing countries. The IMF warned volatility in prices and exchange rates could prompt global risk aversion.

“Currency pressures have so far been limited to a handful of oil exporting countries such as Russia, Nigeria, and Venezuela,” the economists wrote. “Given global financial linkages, these developments demand increased vigilance all around.”

CNBC



17 Comments on "Oil price drop to persist, help global growth"

  1. Makati1 on Mon, 22nd Dec 2014 6:57 pm 

    The so called “growth” can possibly offset the contraction in the West, but I suspect that, real numbers be known, there is no “growth” anywhere. With all of the manipulation of currencies and “facts”, no one really knows what is happening. 2015 may be the year it all comes out in the open. We shall see.

  2. bobinget on Mon, 22nd Dec 2014 7:06 pm 

    Biggest lie:
    Saudi Arabia has also convinced its fellow OPEC members it is not in the group’s interest to cut oil output, however far prices may fall, the kingdom’s oil minister said”.

    Did Iran or Iraq, not to mention
    stone broke Venezuela, if they in-fact endorsed
    Saudi Arabia’s downfall?

    While Saudi Sunnies did convince Other Gulf States, all kingdoms, not so much anyone else.

    “IMF economists said 65 to 80 percent of the price decline owed to supply factors, including an unexpectedly quick return to Libya’s oil production and Iraq’s steady supply”
    Pants on fire lie.

    Libya, it should be said is managing to export fewer then 300,000 B p/d

    Iraq’s squabbling with the Kurds who BTW are saving Baghdad from being over-run by IS>

    Kurds evicted IS from Kirkuk just the other day.

    Syria has ben a net importer for two years.

    If the Saudis stop suppling Egypt, another net importer, one with no money, the entire peninsula
    goes haywire.

  3. Apneaman on Mon, 22nd Dec 2014 8:33 pm 

    Before co-founding Energy Aspects in 2012 professional talking head, Richard Mallinson, “gained over 6 years of central Government experience both in the UK and overseas.” That makes him a god damn genuine expert; same as all former government employees of course. Wow New Zealand ministry of education.

    https://uk.linkedin.com/in/richardmallinson

  4. Perk Earl on Mon, 22nd Dec 2014 9:58 pm 

    Current oil price here:
    http://www.bloomberg.com/energy/

    This new lower oil price may persist, but it appears from watching the oil price decline, it has recently stabilized.

  5. byronwalter on Mon, 22nd Dec 2014 10:32 pm 

    As of 12/22 Libya is not exporting 300,000 bpd as their forth largest port was shut down due to new fighting.

    http://www.bloomberg.com/news/2014-12-22/libya-oil-output-drops-as-fighting-spreads-to-third-oil-port.html

    Surprised me to read that as recently I seem to recall Libya was producing around 700,000 bpd.

    And back in the USSR, I mean Russia:

    http://www.ft.com/intl/cms/s/0/5fab8828-7651-11e4-a704-00144feabdc0.html#axzz3Mgxi3TD9

    However the US economy is puttering along at a decent clip, especially compared to the rest of the world due to access to capital, cheap energy (relative to the rest of the world), robots for manufacturing, and infrastructure.

    OTOH, with oil in this price range, I’d expect Texas and North Dakota to be headed into recession Q1.

  6. westexas on Tue, 23rd Dec 2014 7:19 am 

    One would think, from MSM articles, that we have never before seen a decline in oil prices.

    Monthly Brent prices fell by about 70% in 2008, from $133 in July, 2008 to $40 in December, 2008.

    It looks like the monthly Brent price fell from $112 in June, 2014 to around $64 for December, 2014, which would be a decline of 44%. However, the annual price in 2008, $97, is going to be quite similar to the annual price in 2014, probably right around $99.

    The 2008 monthly decline bottomed out at $40 in December, 2008, and the three year annual rate of increase in monthly Brent prices, from December, 2008 ($40) to December, 2011 ($108) was 33%/year.

    The year over year decline in annual prices was from $97 in 2008 to $62 in 2009. And of course two years later, annual prices ranged from $109 to $112 for 2011 to 2013 inclusive.

    However, according to the EIA, Saudi total petroleum liquids production (+ other liquids) declined from 11.2 mbpd in July, 2008 to 10.0 mbpd in December, 2008, which does not seem to be a pattern that the Saudis are currently emulating.  

    Having said that, after Saudi net exports increased from 7.1 mbpd in 2002 to 9.1 mbpd in 2005, their annual net exports have been below their 2005 rate for eight straight years, and I estimate that the Saudis have already  shipped, through 2013, about 40% of their post-2005 CNE (Cumulative Net Exports).  

    I suspect that the Saudis have been unwilling or unable (take your pick, more likely the latter in my opinion) to exceed their 2005 net export rate of 9.1 mbpd, and they have been waiting for a decline in global demand, as an opportunity to maintain their production and net exports, as a way to damage high cost producers.   However, in my opinion, that’s against a backdrop of a huge rate of depletion in remaining Saudi CNE.  

  7. Makati1 on Tue, 23rd Dec 2014 8:03 am 

    Westexas, I wonder what a year of $20 oil would do to your theory?

  8. rockman on Tue, 23rd Dec 2014 8:06 am 

    “The recent drop in oil prices should persist, helping to boost global economic activity by up to 0.7 percentage points next year, two senior IMF economists wrote in a blog on Monday.”

    “Next year”. Been in the oil patch for 40 years and have been hearing that same phrase during good times and bad. So many different ways to judge global economic activity…some valid…some garbage. Let’s take oil consumption as a fairly meaningful metric in that regard. There are others but this data is so readily available. And we don’t have to go back very far: just 5 years. Ignoring the oil price spike at the end of ’08 look at what the global economy had to deal with throughout that entire years: average price of oil: $98/bbl. And then BAM!…oil prices crash with the average price for the year 2009 at $58/bbl. A 40% reduction in what they world had to pay for oil. Very similar to what we’ve just experienced. And the IMF economist see this drop boosting global activity in 2015.

    Well, given the obvious similarity between these two periods we can use the 2008 price crash as model and judge the boost to economic activity, as measured by oil consumption, just as it did in 2009. Global oil consumption: 2008 – 86.046 million bopd; 2009 – 84.971 million bopd. So the global economy consumed 400 million bo less of $58 oil in 2009 than it consumed of $98 oil in 2008.

    OK…let’s forget the rest of the world: when it comes to oil consumption the US is the big dog in the room. And we’re so much more advanced than most nations when it comes to turning oil into economic growth. US oil consumption: 4Q 2008 – 19.08 million bopd; 4Q 2009 – 18.93 million bopd. So the US, one of the largest economies on the planet and very disproportionately dependent upon oil for economic growth compared to other countries, consumed over 13 million bbls LESS of cheaper oil in 4Q 2009 than in 4Q 2008.

    Well, history doesn’t always repeat itself so maybe the IMF boys have it correct. OTOH I doubt the global economy makes major correction much faster today the it did just 5 years ago.

    BTW: China consumed 136 million bbls of oil in 2009 MORE than it did in 2008, if anyone was curious.

  9. Apneaman on Tue, 23rd Dec 2014 8:47 am 

    The video in this piece is hilarious. Watch the MSM weasels squirm as old T-Boone refuses to be shoehorned into their narrative.

    http://www.zerohedge.com/news/2014-12-23/t-boone-pickens-rages-cnbc-i-am-expert-not-you-says-oil-down-due-weak-demand

  10. Nony on Tue, 23rd Dec 2014 9:19 am 

    Rock, that’s because we had this thing in 2009 called a recession. A huge one. You keep looking under rocks for one now (every price drop has to be demand in your worldview, every price rise, Hubbert at work). You won’t find one. This is a supply-caused correction.

  11. westexas on Tue, 23rd Dec 2014 9:51 am 

    What theory?

  12. shortonoil on Tue, 23rd Dec 2014 11:41 am 

    The Etp model predicts that the average cost of production will increase by 37% between 2015 and 2020. During that same period consumer affordability will decrease by 85%. Coupled with a better than 400% increase in the volatility of petroleum prices from historical norms we expect a significant crisis to appear in the petroleum industry over the next 5 years.

    http://www.thehillsgroup.org/

  13. Perk Earl on Tue, 23rd Dec 2014 11:54 am 

    T-Boone is right too. Even if oil supply is slightly rising, demand should be great enough to gobble up that increase and demand more via increased economic activity. But, demand did not do that due to price being above the affordability ceiling, so price had to come down to increase demand, thus in turn reducing supply sufficiently to cause an increasing price sometime in the future.

    The real question is; What will be the impact of a lower oil price on the oil industry and future supply. Answer; depends on how long it stays this low in relation to cost of marginal oil sources production.

  14. Nony on Tue, 23rd Dec 2014 12:46 pm 

    peak erle: Thus proving you don’t understand the most basic concept of movement along a demand or supply curve (versus shifts of the curves). You’re like the econ version of someone who doesn’t understand thermodynamics and blathers about heat engines violating Carnot.

  15. Makati1 on Wed, 24th Dec 2014 5:01 am 

    Just read an article that said $33 oil is the correct price vs NG prices, historically. Should be interesting to watch the events if it slips that low and stays there.

  16. Kenz300 on Wed, 24th Dec 2014 10:09 am 

    Shale, tar sands and deep water are now the swing producers. They are also the high cost producers.

    They will be reducing investment in new production this coming year. That will slow new production growth and depletion will take care of the rest.

    Enjoy the lower oil prices while they last. They will give the global economy a much needed boost at the expense of Russia, Iran, OPEC and the shale and tar sands producers.

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