How long will the oil-price shock last?

From Marek Dabrowski at Bruegel:

……the depth of the oil-price shock looks comparable with that of the second half of 2008 and early 2009. However, while the 2008-2009 shock resulted from a temporary liquidity crisis caused by the Lehman Brothers bankruptcy, the current shock seems to be underpinned by more fundamental demand- and supply-side factors.

On the demand side, there are the observed slowdowns of emerging-market economies, effects of energy-saving policies in developed and developing countries, and the gradual tightening of US monetary policy, which reduced the appetite for speculative purchases of oil and other commodities. In speaking about the demand side, we mean massive investment in new oil-production capacities, including shale oil, in the last two decades (Dale, 2015), the declining market power of the OPEC cartel and development of alternative energy sources.

Consequently, the lower level of oil prices could reflect a new market equilibrium and could last longer than the short-term price declines of 1998-1999 and 2008-2009. The current situation is more reminiscent of the dramatic oil price adjustment observed in the mid-1980s, after which low prices dominated for more than a decade. If this scenario is repeated now, all net oil exporters will face inevitable challenges of both macro- and microeconomic adjustment in the long term.

…..Overall, countries that conducted prudent macroeconomic policies and built-up large fiscal buffers in boom years (Gulf countries, Norway, Brunei Darussalam) have had more room to manoeuvre in choosing the right policy response to the price shock, compared to those that had smaller or no reserves. In particular, they could employ countercyclical fiscal policy to mitigate the effect of lower prices (see above).

I am sure most Australians can relate to this conclusion.

Source: The impact of the oil-price shock on net oil exporters | Bruegel

5 Replies to “How long will the oil-price shock last?”

  1. all of what you say is true but you ignore the geopolitical aspects. how long will saudi arabia be able to sustain their production level at the current low price before it has a de stabilizing effect on their own economy. they are attempting to increase/maintain their market share in view of the increased world wide production (most of which has higher production costs) and keep the oil income to iran from their new post embargo contracts to a minimum. if instead of maintaining current production levels saudi arabia cuts back as they have in the past, the effect may not be as significant as before but it would move the current low price higher immediately.

    1. Catch-22. Maintain current production levels in order to minimize the fiscal deficit …….or increase the fiscal deficit by cutting production in the hope that this will raise prices (and reduce the fiscal deficit).

      I believe their strategy is sound. They have the lowest marginal cost of production and can maintain current levels long enough to see off other suppliers — either through financial collapse of shale-drillers or fiscal collapse of other oil-producing countries. Geo-political as you say. Their primary target must be Iran.

      Breakeven Oil Price (USD / bbl) / Marginal Cost of Production (2014)
      Venezuela 149.90 / 20.00
      Oman 106.50 / 15.00
      Bahrain 134.40 / ?
      Nigeria 141.70 / 15.00
      Qatar 60.50 / 15.00
      Saudi Arabia 93.10 / 3.00
      Kuwait 68.30 / ?
      Russia 113.90 / 18.00
      UAE 82.70 / 7.00
      Algeria 119.00 / 15.00
      Angola 94.00 / 40.00
      Ecuador 122.00 / 20.00
      Iran 136.00 / 15.00
      Iraq 116.00 / 6.00
      Libya 111.00 / ?


  2. Oil is just displaying the characteristics of most commodities which are produced by emerging economies.When prices drop, these countries raise production to maintain income levels. In the past, oil was special because Saudis cut production and, in the process, brought supply down. Since they lost market share in this process, this time they have decided to maintain production. They are dipping into their huge currency reserves. Estimates are that they can maintain this for another 7-10 years. It is tempting to observe that oil at $10-$15 a barrel would clean out a lot of the countries shown above including most American producers with the exception of the Permian Basin, thanks to fracking and horizontal drilling..

    1. Most vulnerable are those countries with a pegged exchange rate. A floating rate acts as a shock-absorber, softening the immediate impacts of the oil price fall, as with Russia, but inflation is likely to spike as cost of imports rise and can still cause domestic problems.

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