Gains from low oil prices can be substantial for developing country importers if supported by stronger global growth, says the World Bank.
The bank in the analysis of the oil price decline, contained in the latest edition of the Global Economic Prospects, says the drop reflects a confluence of factors, including several years of upward and downward surprises in oil supply and demand, respectively.
Other factors are receding geopolitical risks in some areas of the world, significant change in policy objectives of the Organisation of the Petroleum Exporting Countries (Opec), and appreciation of the US dollar.
The World Bank says although the relative strength of the forces driving the plunge in prices remains uncertain, supply related factors appear to have played a dominant role. Soft oil prices are expected to persist in 2015 and will be accompanied by significant real income shifts from oil-exporting to oil-importing countries. For many oil-importing countries, lower prices contribute to growth and reduce inflationary, external, and fiscal pressures.
Crude oil prices fell below $50 a barrel for the first time since May 2009 on Wednesday as global business growth slowed to its weakest in a year.
However, weak oil prices present significant challenges for major oil-exporting countries, which will be adversely impacted by weakening growth prospects, and fiscal and external positions. If lower oil prices persist, they could also undermine investment in new exploration or development. This would especially put at risk investment in some low-income countries, or in unconventional sources such as shale oil, tar sands, and deep sea oil fields.
Deceleration in trade
“For policymakers in oil importing developing countries, the fall in oil prices provides a window of opportunity to undertake fiscal policy and structural reforms as well as fund social programmes,” said Ayhan Kose, Director of Development Prospects at the World Bank.
“In oil exporting countries, the sharp decline in oil prices is a reminder of significant vulnerabilities inherent in highly concentrated economic activity and the necessity to reinvigorate efforts to diversify over the medium and long term.”
The analysis on oil prices in Global Economic Prospects is complemented by two features on how trends in global trade and remittance flows are impacting developing countries.
Global trade expanded by less than 3.5 per cent in 2012 and 2013, well below the pre-crisis average annual rate of 7 per cent, holding back developing country growth in recent years. Weak demand, mainly in investment but also in consumer demand, is one of the main causes of the deceleration in trade growth.
With high-income countries accounting for some 65 per cent of global imports, the lingering weakness of their economies five years after the crisis suggests that weak demand continues to adversely impact the recovery in global trade.
However, long-term trends have also slowed trade growth, including the changing relationship between trade and income. Specifically, world trade has become less responsive to changes in global income because of slower expansions of global supply chains and a shift in demand from trade-intensive investment to less trade-intensive private and public consumption.
The analysis finds that these long-term factors affecting trade will also shape the behaviour of trade flows in the years ahead—in particular, that the expected recovery in global growth is not likely to be accompanied by the rapid growth in trade flows observed in the pre-crisis years.