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Declining oil prices a positive impact on the world’s economy

Published on 15th Dec, Edition 50, 2014

 

According to International Monetary Fund Managing Director Christine Lagarde the plunge in oil prices since June may hurt some crude exporters. But overall it is a good thing for the world economy. She said “there will be winners and losers, but on a net basis it’s good news for the global economy,” she said in Washington recently while commenting over the declining oil prices and of last Organization of the Petroleum Exporting Countries (OPEC) meeting. While some exporters are hurting from the price fall, overall it will add significantly to global growth as consumers and businesses pay less for energy.

Morgan Stanley slashed its 2015 base case forecast for Brent to $70 from $98 a barrel and for 2016 to $88 from $102 a barrel. In its bear-case scenario, the bank sees the crude benchmark falling to a low of $43 a barrel in the second quarter of next year. According to HSBC, US output is expected to rise by 1.4 million barrel per day this year. Libya’s output is also recovering. Unexpected economic weakness in the eurozone, Japan and China has cut estimates of global demand by 0.5 million barrel per day this year. The continued fall of oil prices could lead to the postponement or cancellation of $150-billion worth of projects worldwide, according to a Norwegian consulting firm.

In recent months one in four new Canadian oil projects have been highlighted as vulnerable to cancellation or postponement if oil prices fall below $80 per barrel for an extended period of time, according to the International Energy Agency.

Between late June and the beginning of this month, the price of crude oil fell by 38 percent. This is a big decline. But a bigger one occurred between the spring of 1985 and the summer of 1986. Production triggered by the two ‘oil shocks’ of the 1970s; and the emergence of significant production in non-OPEC countries, such as Mexico and the UK.

Top oil exporter Saudi Arabia blocked calls from poorer members of the Organization of the Petroleum Exporting Countries (OPEC) to reduce production at the group’s meeting on November 27, fueling a further slide in oil prices which have lost more than 40 percent since June. With OPEC on the sidelines, oil prices face their greatest threat since 2009, but expected a volatile 2015 rather than a one-way trade.
Saudi Arabia cut its monthly prices for crude it sells to the United States and Asia, a move that analysts say shows it is stepping up its battle for market share. Investors were also seeing trade data from China with further evidence of economic weakness in the world’s No. 2 oil consumer likely to pile more pressure on prices. Reflecting lackluster domestic demand, China’s imports fell 6.7 percent in November from a year earlier, coming in well below expectations and adding to concerns the world’s second-largest economy could be facing a sharper slowdown.

Iran recently unveiled a draft budget for next year based on oil prices remaining around $70 per barrel. President Hassan Rouhani stated that the country would become less dependent on crude. With international prices at five-year lows on the back of oversupply worries and a stronger dollar, major oil producers are having to juggle their finances to compensate for lower than expected revenues. The Iranian President admitted the budget for the fiscal year starting in March 2015 “would be under pressure” given the big fall in oil prices in recent months, from above $100 to less than $70. In the short term, Iran will have a decrease in revenues. The country economy must move towards non-oil exports. The oil price drop is a new opportunity to accelerate this.

 

Iran has the world’s fourth largest proven oil reserves and currently exports around 1.3 million barrels per day. However, Rouhani said oil revenues earmarked for the budget would be $24 billion next year, down from $27.5 billion, meaning less than half the government’s income would come from exported crude. Iran had already announced some tax rise plans on the back of the recent oil price fall, along with increases in non-oil exports. Next year’s non-oil-based revenues will constitute more than half the government’s total income, rising to 53 percent from the current 47 percent, according to forecasts. Total spending will rise 8.5 percent.

A steep fall of around 35 percent in international oil prices, the economic observers say will help the government of Pakistan save at least $ 5 billion a year on account of oil imports. Also, combined with improved foreign inflows, the current southward trend in crude oil prices would keep the inflation rate as low as the State Bank would find some ‘room’ to cut the 9.5 percent discount rate by further 50-100 basis points (bps) in months to come, the analysts said.

The Pakistan Bureau of Statistics (PBS) recorded the consumer price index (CPI) inflation during November at 3.96 percent compared to 10.90 percent of last year. This, the analysts said, showed an 11-year low. Up to November 21, the central bank recorded the country’s dollar reserves at $ 13.219 billion which, Finance Minister Ishaq Dar claims, would hit the $ 15 billion by the end of this month.
overnment Bearish sentiment prevailed at the KSE during the outgoing week, as investors remained concerned ahead of a key political gathering on the weekend in the capital city. Meanwhile, heavy-weight oil sector took a battering on tumbling international oil prices as OPEC decided not to cut their oil output.

Pakistan reentered the international Sukuk market after a gap of nine years, accepting bids of US$1.0 billion. Experts believe successful Sukuk issue comes as another positive for Pakistan external account, which coupled with the expected US$1.1 billion from the IMF in mid-Dec and declining oil prices should help Pakistan foreign exchange reserves to reach US$15 billion or 4 months of import cover by end Dec-2015. Government share sales in Habib Bank Limited and Allied Bank Limited to $350 million under the Coalition Support Fund from the US in first quarter 2015 and next IMF tranche of $550 million can help lift Pakistan foreign exchange reserves to $16 billion by end Mar-2015.

The government has reduced the prices of petroleum products in line with the fall in the international oil prices. Overall approximately Rs22 have been slashed in two months from petroleum prices, bringing general relief to the consumer. Although the actual effect on consumer goods is yet to be felt as people are able to save a few rupees from their petrol expense despite the prices of commodity and other essential will be lowered.

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