Low Oil Price Providing a $1.3 Trillion Fiscal Stimulus
Whatever
it is, lower oil prices will also mean savings for almost all nations,
and in actual fact may go a long way to boosting demand and improve
savings for reallocation of resources to other areas of the global economy. The report below from Bloomberg pegged stimulus at $1.1 trillion, now it should be $1.3 trillion. Thats a whole lot of QE in a different form and manner. Not all news is bad, the pendulum may swing but there is always a counter balance.
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The lowest oil price in four years will provide stimulus of as much as
$1.1 trillion to global economies by lowering the cost of fuels and
other commodities, according to Citigroup Inc.
Brent, the world’s most active crude contract, closed at $83.78 a barrel inLondon yesterday.
That’s more than 20 percent below its average for the past three years,
amounting to savings of about $1.8 billion a day based on current
output, Citigroup estimates. Savings will climb to $1.1 trillion
annually as the slide cuts costs of other commodities, leaving consumers
and companies with extra cash to spend and bolstering growth, according
to Ed Morse, the bank’s head of global commodities research in New York.
Crude prices are plunging amid signs that OPEC, supplier of 40 percent
of the world’s oil, won’t act to eliminate a surplus as global growth
slows. Combined supplies from the U.S. and Canadarose
last year to the highest since at least 1965 as producers tapped stores
locked in shale-rock formations and oil sands. The global economy will
rebound next year, with growth quickening to 2.98 percent, the fastest
since 2010, according to analyst forecasts compiled by Bloomberg.
“A reduction in oil prices also results in a reduction in prices across
commodities, starting with natural gas, but also including copper,
steel, and agriculture,” Morse said yesterday in an e-mailed response to
questions. “All commodities are energy intensive to one degree or
another.”
Commodity Prices
Regular gasoline averaged nationwide in the U.S. dropped to $3.163 a
gallon, the lowest in more than three-and-a-half years, Heathrow,
Florida-based motoring group AAA said on its website yesterday. The
Bloomberg Commodity Index slumped to a five-year low, about 50 percent
below its peak in July 2008. Copper, natural gas, coal and iron ore are all far below their peaks.
“Cheaper oil is an advantage for both consumers as well as industrial
and manufacturing operations, especially as winter approaches,” Myrto
Sokou, an analyst at Sucden Financial Ltd. in London, said by e-mail
yesterday.
As lower energy prices help reduce commodity costs, they can push down
the inflation rate. While freeing up more money for consumers, outsized
declines could become a concern in places likeEurope, where policy makers are trying to stave off deflation, which can exacerbate an economic slump.
The euro area will have inflation of 0.5 percent this year, according to
estimates compiled by Bloomberg. Consumer prices globally will increase
by 2.47 percent in 2014, about the same as last year, the forecasts
show.
Oil Analysts
Brent rebounded from the lowest level in almost four years today, rising
47 cents to $84.25 a barrel at 1:13 p.m. in New York on the ICE Futures
Europe exchange.
“Lower prices, for most economies, reduce the cost of doing business and support economic growth,” the International Energy Agency said in a report Oct. 14. “Lower prices offer a cushion of sorts against an otherwise vulnerable macroeconomic backdrop.”
The Paris-based adviser to governments said in the same report that oil
demand will expand by about 650,000 barrels a day this year, half the
pace it anticipated in July.
Nations in the Organization of Petroleum Exporting Countries may resist
cutting output in response to the slowing demand growth to try and test
the prices at which some North American supply is profitable, Antoine Halff, head of the IEA’s oil industry and markets division, said.
A decline to $80 would cost OPEC $200 billion of its recent earnings of
$1 trillion, Morse said in an analysis on the topic that was published
yesterday in the Financial Times.
Big Chunk
Oil prices rose to a record in 2008, boosting revenues for nations including Russia as well as Middle East states such as Saudi Arabia, Kuwait and the United Arab Emirates. It also increased prices for consumers in industrialized nations.
“It is a big chunk of stimulus,” Seth Kleinman, Citigroup’s head of
European energy research, said by phone from London. “The macro economic
analysis of higher oil prices was
always that it is essentially a wealth transfer from leveraged spending
U.S. consumers to saving Middle East sovereigns, so ultimately it
reduces the global velocity of money significantly and it’s a net drag.
Now a price fall reverses that.”
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