Lower-for-longer’ oil-price outlook shapes global trends, economists say

— Published in OGJ, WASHINGTON, DC on 2nd November 2015

Indications that crude-oil prices will stay lower for longer than previously anticipated are already starting to affect global economic trends in both energy producing and consuming countries, speakers said at a Nov. 2 Center for Strategic and International Studies event.

They said the question now is whether developing and industrializing countries’ governments will enact policies that find ways to get more energy to emerging middle class consumers which respond to their actual needs.

“Improvements we’ve made in energy efficiency are ironically mitigating the economic benefits of a lower oil price,” said Daniel Ahn, a senior advisor to the US Department of State’s Chief Economist. “At least for the moment, there seems to be some temporary relief. The question is whether we can transmit this into broader structural reform.”

Joyce Chang, who heads global research at JP Morgan Chase & Co., said, “There are a lot of differences this time around. Emerging markets have about $10 trillion of foreign exchange reserves. Nobody is questioning that China will support its state-owned enterprises and Brazil will support Petrobras. But many emerging countries were counting on China’s demand being there, and that’s not happening. I think of it more as a slow bleed.”

Catherine Wolfram, faculty director at the Haas School of Business Energy Institute at the University of California at Berkeley, said, “Migration to urban centers from rural locations, where energy demand isn’t as intense, also matters. Right now, in India where they are more than 1 billion people, only 6 million have air conditioners.”

Developing nations such as Kenya already have massive electrification programs aimed at supplying hospitals and schools that brought transmission lines closer to individual households, she noted. “Now, there are households without electricity that are right next to the infrastructure. They literally could throw a rock and hit a transformer,” Wolfram said. “Describing these people as off-grid is not accurate. It’s less a logistical and more an economic problem. In the average Kenya household, being connected costs about $400, or about half the average annual economic income.”

Stronger borrowing reserves

Ahn said lower crude prices affect each producing nation differently. “Some are more dramatically hurt because of their dependence on oil exports to support their economies,” he said. “I think all break-even prices should be taken with a little salt. Relative winners and losers are emerging not just among consumers but also producers, particularly those with stronger borrowing reserves compared to those which were living relatively from hand to mouth.”

Prospects for relief appear questionable, Ahn said. “Since last year’s dramatic price declines, production has been relatively robust,” he said. “We may need more time for prices and supplies to be balanced, which also has had any interest effect on demand. In the past decade, China and other emerging markets have been driving most of the demand growth while producing nations have benefited economically. Now, that is moving in the opposite direction as demand has fallen and producers have tried to limit output.”

Venezuela, Nigeria, and other producing countries have not made significant progress in reducing or eliminating subsidies for consumers despite lower crude prices providing an opportunity to do so, Chang said. “A second question involves incentives for investment, such as in Mexico where they haven’t gone quite as well as expected after several decades of not even being available,” she observed. “The ability to increase production in places like Iraq and Iran also needs to be addressed before the necessary financing can become available.”

Wolfram said, “There’s a strong correlation between energy consumption and economic development. This is very likely to change. Lots of people are coming out of poverty, and they’re going to start using energy.” Noting US Energy Information Administration forecasts that developing nations’ energy growth will be about five times that of industrialized countries in the next 5 years, the UC-Berkeley economist said she considers that an underestimate.