Das schwarze Gold verliert seinen Glanz

Gold lost its sparkle in 2013, and now the same fate is befalling oil. The price of Brent crude has slumped from around USD 115 in late June to USD 70 at present, representing a decline of close to 40% in just five months. This trend gained fresh impetus last week when OPEC decided to leave its production target unchanged, which means oil price weakness is set to continue. My colleagues specialising in commodities predict an average oil price of USD 77 during 2015. It seems perfectly obvious that the economic consequences of a lasting decline will have a far greater impact than a temporary dip. Persistently low prices are a boon for the purchasing power of households and businesses, which may already be factoring this into their spending, and restore their confidence. Econometric models show that a USD 10 decrease in oil prices lifts euro-zone GDP by 0.4% over three to four quarters. With this decline now amounting to around USD 40 since the end of June, it is tempting to multiply the corresponding increase in GDP by 4, which would point to a tremendous surge in growth. That is not a realistic proposition, however, because the decline from its peak is smaller in euros (33% compared with 39% in US dollars) and the impact of a fall in oil prices depends on the situation: when unemployment is high and demand weak, the reaction will not be as strong. Even so, we can add the downturn in oil prices to the list of factors–low interest rates, a weaker euro, a far less restrictive policy than previously, the prospect of greater demand for credit and easier access to bank lending–that are expected to give a lift to the European economy during 2015. The latest measures taken by the ECB to bring about a substantial increase in its total balance sheet will also stimulate renewed confidence.

Unfortunately, there is a flip side to all this good news. The drop in oil prices means a loss of income for oil-exporting countries. The consequences will vary from one country to another, but will generally cause the budget deficit to widen, trade and current account surpluses to narrow and thus the funds available for investment in the West (via US Treasury bonds, for instance) to contract, and it may put pressure on currencies (such as the rouble). As for oil sector groups, the slump may drive down investment and therefore lead to a more timid increase in future oil production. In the United States, it is worth keeping a close eye on the repercussions for the shale oil and gas industry and especially for highly indebted groups: the slump in prices has brought them closer to their tolerance threshold and may ultimately create financial difficulties for them, although this is more of a risk in 2016 than 2015. These producers have apparently already hedged themselves against a fall in prices during 2015.

William De Vijlder, Group Chief Economist BNP Paribas