December 22, 2014

Seven Questions About The Recent Oil Price Slump

Oil prices have plunged recently, affecting everyone: producers, exporters, governments, and consumers. Overall, we see this as a shot in the arm for the global economy. Bearing in mind that our simulations do not represent a forecast of the state of the global economy, we find a gain for world GDP between 0.3 and 0.7 percent in 2015, compared to a scenario without the drop in oil prices. There is however much more to this complex and evolving story. In this blog we examine the mechanics of the oil market now and in the future, the implications for various groups of countries as well as for financial stability, and how policymakers should address the impact on their economies.

In summary:

  • We find both supply and demand factors have played a role in the sharp price decline since June. Futures markets suggest that oil prices will rebound but remain below the level of recent years. There is however substantial uncertainty about the evolution of supply and demand factors as the story unfolds.
  • While no two countries will experience the drop in the same way, they share some common traits: oil importers among advanced economies, and even more so emerging markets, stand to benefit from higher household income, lower input costs, and improved external positions. Oil exporters will take in less revenue, and their budgets and external balances will be under pressure.
  • Risks to financial stability have increased, but remain limited. Currency pressures have so far been limited to a handful of oil exporting countries such as Russia, Nigeria, and Venezuela. Given global financial linkages, these developments demand increased vigilance all around.
  • Oil exporters will want to smooth out the adjustment by not curtailing fiscal spending abruptly. For those without savings funds and strong fiscal rules, budgetary and exchange rate pressures may, however, be significant. Without the right monetary policies, this could lead to higher inflation and further depreciation. 
  • The fall in oil prices provides an opportunity for many countries to decrease energy subsidies and use the savings toward more targeted transfers, and for some to increase energy taxes and lower other taxes. 
  • In the euro area and Japan, where demand is weak and conventional monetary policy has done most of what it can, central banks forward guidance is crucial to anchor medium term inflation expectations in the face of falling oil prices.

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October 22, 2014

Natural Gas: The New Gold

Natural gas is creating a new reality for economies around the world. Three major developments of the past few years have thrust natural gas into the spotlight: the shale gas revolution in the United States, the reduction in nuclear power supply following the Fukushima disaster in Japan, and geopolitical tensions between Russia and Ukraine.

What’s cooking

Over the last decade, the discovery of massive quantities of unconventional gas resources around the world has transformed global energy markets, and reshaped the geography of global energy trade (see map). Consumption of natural gas now accounts for nearly 25 percent of global primary energy consumption. Meanwhile, the share of oil has declined from 50 percent in 1970 to about 30 percent today.

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July 29, 2014

Spillovers from a Potential Reversal of Fortune in Emerging Markets

From their high point before the crisis, emerging market economies are slowing down on a broad basis. This report explores what defines the slowdown and the diversity of relevant spillovers that may arise for advanced economies, other emerging market economies, and low-income countries. The defining features of the slowdown have been its gradual, protracted, and synchronized nature. Against a backdrop of weaker potential growth and productivity performance, the slowdown may be structural to an important degree. Growth spillovers from emerging economies can be noticeable for the global economy. Spillovers transmit mostly through trade linkages, but they also can have sizable effects through financial linkages, including through banks. Given the major role of emerging market economies in commodity markets, lower growth in those economies would likely lead to lower commodity prices—which act as a stabilizer at the global level, but with distributional implications through the terms of trade at the country level. Moreover, localized spillovers originating from large emerging market economies can be significant, with the channels of transmission depending on neighborhood-specific linkages. Risks and spillovers from slowing emerging economies will depend on the extent to which structural factors are at play and whether policy efforts can improve growth.

March 1, 2014

Aid and Oil

Growing numbers of large oil discoveries in low-income countries could reduce the need for foreign aid

Foreign aid has long been a sizable source of funding for developing economies. In 2012, major donors disbursed $127 billion, two-thirds of it to low-income countries in Africa and Asia. Foreign aid—more precisely official development assistance—is a drop in the bucket for donor countries, about 0.3 percent of their combined GDP. But it is a major source of funding for some developing economies—amounting to 15 percent of Liberia’s GDP and 5 percent of Burundi’s, for example (see chart).­

Foreign aid comes in many guises, but the most prominent is development assistance, which advanced economies disburse to poorer economies to promote economic and social development and is measured by the Development Assistance Committee of the Organisation for Economic Co-operation and Development. The general long-run objective of development aid is the alleviation of poverty and promotion of welfare in low- and middle-income countries through budgetary assistance and access to technology—although there is no clear evidence yet to support a relationship between aid and economic performance. 

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