Winners and losers from the plunge in oil prices

The recent sharp drop oil prices represents a large transfer of
wealth from producers of oil to consumers of oil — roughly $1.5
trillion, or 2% of world GDP.
There are two reasons to expect that such a transfer will have a
net positive effect on the global economy. First, oil consumers
have a much bigger weight in global GDP than oil producers.
Second, if recent history is a guide, oil-importing countries tend
to spend a larger share of their “windfall” than oil-exporting
countries. Of course, some countries, such as Canada and the
United States, are both producers and consumers of energy.
Who is helped and who is hurt?
Helped: $80 billion tax rebate equivalent for the United States.
A drop in the prices of oil and products derived from oil
(gasoline, diesel, jet fuel, heating oil, etc.) increases the
purchasing power of consumers and businesses. For example,
the (roughly) 80 cent per gallon drop in the pump price of
gasoline in the United States in recent months is the equivalent
of $80 billion tax rebate.
It also has the added benefit of boosting consumer confidence.
Businesses that use a lot of oil (such as agriculture and
transportation) will also see a significant reduction in their costs.
The positive impact of lower oil prices is the greatest in those
countries (e.g., the United States) where both energy taxes and
subsidies are low. Where fuel taxes are high (e.g., Europe) or
where fuel subsidies are generous (numerous emerging
markets), the impact of an oil-price drop on consumer and
business incomes is proportionally smaller.
While steep declines in the price of oil and other commodities
may exacerbate deflationary pressures in some economies, for
example China, the Eurozone and Japan, it will also give many
central banks more room to maneuver, allowing them to either
keep policy very loose or to provide more stimulus.
Hurt: Producers of oil
Lower oil prices translate into lower revenues for oil companies
and governments of oil-exporting countries. Iran, Russia, and
Venezuela are particularly at risk. All three countries rely on high
oil prices to balance their budgets. The so-called fiscal
breakeven point for all three is much higher than current prices—
well over $100.
Iran and Venezuela have low financial reserves and especially
profligate budgets. In the case of Venezuela, the risks of a
sovereign default have risen. Russia, on the other hand, has a
little more room to maneuver, given its higher foreign-exchange
reserves. Nevertheless, falling oil prices are only adding to the
pain of sanctions and capital flight, as evidenced by the free-fall
of the ruble in December.
Overview of impacts by key regions and economies
Predictably, different regions of the world will see differential
effects from lower petroleum prices. The following are the
increases/decreases in 2015 growth, assuming that the current
level of prices ($60 to $70 for Dated Brent) is sustained through
the year. These impacts are muddied by domestic developments
in each economy (e.g. weakening domestic demand in China
due to the ongoing property bust).
North America. US real GDP growth will likely
be boosted by 0.3 to 0.5 percentage points, with a
sizable contribution from consumer spending. The
impact will be smaller (0.2 to 0.3 percentage
points) in Canada, given the bigger role played by
energy. On the other hand, because Mexico relies
on oil for one third of its government revenues,
growth will likely be cut by 0.2 to 0.4 percentage
points.
Western Europe. The boost in European growth
will be roughly in the same order of magnitude as
the United States (up about 0.3 to 0.4 percentage
point). Not all countries will benefit, however.
Specifically, Norway, a major oil exporter, could
see a drop in GDP growth of 0.2 to 0.4 percentage
point
Emerging Europe. Lower oil prices will help key
Central European countries such as Poland and
Turkey, adding 0.5 to 0.7 percentage point to GDP
growth. On the other hand, it will hurt the major oil
exporters of the region and will likely contribute to a
deep recession in Russia.
Asia. The net effect on Asia will be positive, but
probably small. Both China and Japan could see a
boost to their GDP growth rates of 0.2 to 0.3
percentage point. The impact on India and
Indonesia (both net importers of oil) will be a little
larger, at 0.4 to 0.5 point. The magnitude will
depend on what actions, if any, the governments in
these economies take on fuel subsidies.
Central and South America. The impact of
falling oil prices on the Latin American economies
will be mixed. Net oil importers—such as Brazil,
Argentina, Chile, and the Central American
countries—could see a small boost to growth of 0.2
to 0.3 percentage points. At the other extreme,
Venezuela’s economy will suffer a deep downturn.
Middle East and Africa. Countries in the region
hurt by lower oil prices include Kuwait, Iran, Libya,
Saudi Arabia, UAE, Angola, and Nigeria. The hit to
GDP growth could be as much as 1.0-1.5
percentage points. Countries benefiting from lower
oil costs include Jordan, Lebanon, Morocco,
Tunisia, South Africa, and Zambia.
Since the key beneficiaries of the recent oil price declines are the
biggest economies in the world—the United States, the European
Union, China, and Japan)—the net effect on global growth will
likely be in the positive and in the range of 0.3-0.5 percentage
points.