Impact of the Falling Oil Price: It’s Complicated
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The Falling Price
In the past few months， the plunge of oil prices has escalated. The trend is likely to prevail through much of 2015.
In summer 2008， the oil price hovered close to $150 per barrel and Goldman Sachs predicted it would exceed $200 by that year-end. But then the global economic crisis caused the crude Brent price to plunge to $45.
After stimulus packages and recovery policies， the price climbed to nearly $130 in early 2011. It fell to $110 in 2013， and in 2014， it plunged again； to less than $50 recently. As crude prices fell to their lowest level in five years in early December， 2014， investors concluded that the world economy was about to face another challenging year and the Dow Jones Industrial （DJIA） suffered a 316-point loss to 17281.
Having lost their oil markets in the US and Europe， Nigeria and Colombia have been pushing their oil shipments to China. In response， Saudi Arabia cut its official crude price in Asia by $1 per barrel， and Iran and Kuwait followed. The energy producers’ rivalry for market share is fierce.
Some believe that the energy slowdown is really a showdown between Washington and Riyadh. Yet， the underlying drivers of price declines are complicated and involve much more than the energy revolution in the US or Washington’s recent permission for oil exports.
The falling prices are partially driven by the gradual decline of demand in China， which is rebalancing from its most energy-intensive stage toward greater productivity and efficiency.
Meanwhile， several Asian currencies have been softening against the rising US dollar. The price plunge has also been fueled by rising costs of gas in several Asian economies that have been phasing out fuel subsidies， thus lowering demand.
In the tumultuous Middle East， scenarios of production cuts have not materialized. The current consensus is that oil prices will find a floor in the first half of 2015. Prices were initially expected to stabilize in the second half at about $80. But if Saudi Arabia continues to avoid cutting output， prices were expected to stay in the sub-$70 per barrel territory， or， in the light of recent price declines， at the sub-$60 per barrel， for longer than anticipated.
The growth slowdown in China， one of the world’s biggest energy consumers， is also cited as a reason for the nosedive in oil prices. China’s GDP grew 7.3 % in the third quarter of 2014， its slowest pace in five years， down from 7.5% in the second quarter. However， President Xi Jinping has said that China’s economic risks are manageable.
“Indeed there are risks， but not that scary，” Xi said during the Asia-Pacific Economic Cooperation meeting held in Beijing in last November. “Resilience best equips the Chinese economy against risks.”
Surging supply from shale fields in the United States - the highest in more than three decades - and a slowdown in oil demand in Europe are also cited as reasons.
While the oil price slump has been benefiting consumers countries and worrying oil producers， its impact on China appears to be mixed as the country restructures its economy amid a persistent economic slowdown.
The Happy Consumers
falling oil prices translate to a buyers’ market. Along with other major importers， China is benefiting from the new status quo.
Despite the shrinking crude value， OPEC will not cut output to force a slowdown in US production， which has risen to the highest level in three decades. In last December， Saudi Arabia and Iraq widened discounts on crude exports to their customers in Asia， bolstering speculation that group members are fighting for market share， according to a Blomberg report.
China has cut retail prices of gasoline and diesel seven times in a row since late July， 2014 as international oil prices fell. In last October， the country cut the retail price of gasoline by 245 yuan （$40） per metric ton and diesel by 235 yuan.
“Yes， it certainly helps， but it will be very dependent upon how much further the prices drop， where they stabilize and how long they stay there，” said Fred C Beach， assistant director at the Austin Energy Institute at the University of Texas. Oil industry analysts predict that international crude prices might go as low as $50 a barrel， stabilizing at a long-term price range of $75 to $85.
But as oil prices continue to slide， and with no signs of an immediate recovery， it’s “jingle all the way” for the common man in Asia in recent Christmas and New Year， with consumers footing smaller bills and being able to buy more gifts.
“The plunge in oil prices has undoubtedly helped consumers， especially those who reside in oil-importing and oildependent emerging countries in Asia， as the lower fuel prices will certainly contain the cost of living，” says Martin Bodenstein， an associate professor of economics at the National University of Singapore.
Chinese consumers are also having a pleasant time， with inflation at a near five-year low. The National Bureau of Statistics of China indicates that the consumer price index stayed at 1.6% year-on-year in last October， the lowest since January 2010.
Thanks to the record-low oil prices， Chinese consumers have been given a fresh incentive to spend money on cars， giving a boost to the government’s efforts to restructure the economy along more consumption-driven lines， Zhuang Jian， a senior economist at Asian Development Bank in Beijing.
Good News for the Central Bank
Meanwhile， analysts have suggested that the fall in oil prices is a boon for China’s monetary policymakers， because they need not worry so much about the ghost of inflation as they reduce interest rates to spur the economy. On Nov 21， the People’s Bank of China slashed benchmark interest rates for the first time in more than two years. It trimmed the benchmark lending rate by 40 basis points to 5.6 percent， while the one-year deposit rate was cut by 25 basis points from 3% to 2.75%.
Julian Evans-Pritchard， a Singapore-based China economist at research consultancy Capital Economics， said that lower oil prices should invigorate economies in general， increasing government revenues.
“Much depends on how a country responds with changes，” he said. “However， net importers are likely to benefit more than others， with less input costs and an increase in wages.”
China， Japan， India， Singapore and South Korea are the major “energy deficit” countries in the region， according to Capital Economics， importing more oil than they export. In the first 10 months of last year， China imported 252.6 million tons of crude oil， an increase of 9.2% from a year earlier， according to recent Customs data.
The oil price slump is， however， allowing China to spend less while importing more， helping the country save enormously on import bills， as the average price of crude oil imports stood at $769 per metric ton， down 2.4% from a year earlier. China could save around $4.5 billion per month compared to a year ago if the crude oil price stayed at current levels， predicts financial management and advisory firm Merrill Lynch.
“Given the large volume of oil China imports every year， the continuous drop in oil prices on the international market could cut costs for companies that will see their profit margins widen， and consumers whose fuel costs will go down，” said Zhang Bin， director of the Global Macro Economy Research Division at the Institute of World Economics and Politics under the Chinese Academy of Social Sciences （CASS）. According to Zhang’s estimate， the decline in oil prices could save China between $50 billion to $60 billion a year and raise GDP by 0.3 percentage points.
Economists at Bank of America Merrill Lynch estimated that China’s GDP could be pushed up by 0.15 percentage points with each 10% decline in oil prices. As a result， Xu said， the Chinese government will subsequently have more leeway in fine-tuning its monetary policy to support economic growth.
Economic growth slipped to 7.3% in the third quarter of 2014 from a year earlier. December’s weak manufacturing figures suggest annual growth may not hit 7.5 percent for 2014. The weak data has prompted economists and research institutes to downgrade forecasts for China’s 2015 economic growth， and prompted predictions that the country may lower its annual growth target to around 7% at the national legislative session in March.
The Bank of Communications estimated China’s economy may grow 7.2% in 2015 from a year ago. A more pessimistic estimate by the State Information Center， a State-owned think tank， said economic growth will slow to 7% in 2015 from an expected 7.3% in 2014.
By and Large， falling oil price supports higher growth and lower inflation and thusly lends support to the reform drive.“Low oil prices help countries to bring down import bills. And if the import savings are passed on to market， it will in turn keep consumer price inflation low，” said Stephen Ching， associate professor at the University of Hong Kong’s faculty of business and economics.
“Tumbling oil prices are acting as an unexpected stimulus to the Chinese economy， as the cost of oil imports for China - a net oil importer - shrinks substantially， muting the imported inflation effect. Anyway， people will have a happy year ahead，” said economist Samman.
Bad News for Producers
But there are losers， too， in this swing in global oil prices. Although persistent weakness in oil prices might reduce the country’s import costs and provide more room for the Chinese government to fine-tune the economy， it may also put pressure on oil producers， increase deflationary risks and undermine efforts to reduce pollution， they said.
The dip is hitting oil companies severely. Petro- China Co， the country’s top oil and gas producer， posted a 6.2% year-on-year fall in 2014Q3 net profit. China National Offshore Oil Corp posted a 4.6% fall in revenue. The Hong Kong-listed shares of CNOOC have fallen around 20%， while shares in PetroChina have dropped about 15%.
“The lower prices are bad news for oil producers and put pressure on producer pricing index （PPI） and increase deflationary risks，” Zhang from CASS said.
In a move to ease pressure on oil producers， China announced on December 26 it would raise the threshold for windfall taxes on oil output to $65 a barrel from $55.
PPI， which measures price changes for major commodities by manufacturers at the wholesale level， dropped 2.7% year-on-year in last November， its 33rd straight monthly decline.
The negative impacts will not be limited to oil exploration and extraction companies， and to some extent governments that rely heavily on taxes from petroleum production. It may result in other unwanted side effects as well， said analysts， noting the country’s push for green energy risks being delayed as the availability of low-cost oil may dent the eagerness to seek alternative resources.
In a joint statement issued by Chinese President Xi Jinping and US President Barack Obama in last November， China pledged to peak its carbon dioxide emissions by around 2030， and increase the share of non-fossil fuels in primary energy consumption to around 20 percent by 2030.