According to the FT's Lex Column, the falling oil price provides a much bigger economic boost than all the various fiscal stimuli combined (or, as Lex puts it: "government handouts are peanuts by comparison").
The calculation goes like this:
- 2008's average oil price was 100 $/barrel
- This year it's likely to be around 50 $/barrel
- Based on total consumption, the world saves roughly 1,600 bn $
That's a lot of money.
Germany, for instance, saves 50 bn $ (35 bn €), as it consumes roughly 3 % of the world's oil. 35 bn € equals 1.5 % of GDP. Lots of additional money in consumers pockets.
But is it actually correct to say that "the world saves 1,600 bn $"?
True, oil consumers save 1,600 bn $.
But oil producers lose the same amount of revenue.
It's by definition a zero-sum game as far as income is concerned.
For the world as a whole, there can only be a net demand boost if the marginal savings rate of oil consumers is lower than the marginal savings rate of oil producers.
Some oil producing countries have large cash reserves. Saudi-Arabia, the Gulf countries and Norway can afford to cut spending much less than their revenue shortfall. They anyway didn't know what to do with all their 2008 oil revenues.
But others, such as Russia, don't have this luxury. They need to cut, and cut badly. And as a consequence, the world's exports to Russia have plumemted. They wouldn't have plummeted if the oil price had stayed at last year's levels.
As for the US and the UK, which produce a large proportion of the oil they use: Consumers save money on their oil spending. But they also lose money because oil-producing companies in their 401k have lower profits and a lower market-value. True, those that hold a lot of shares probably have a higher marginal savings rate than those that don't. But that's a secondary effect.
And when analyzing total demand, we also need to take into account that oil companies are cutting back on expensive exploration of new fields, as such investment becomes much more risky and less profitable at a low oil price. Fewer investments equal less demand.
And last but not least, consumers in most countries are pretty worried about the future right now. So their marginal savings rate on "windfall gains" is probably rather high.
In short, the net demand boost from lower oil prices can only be a small fraction of those impressive-sounding 1,600 bn $. For a country like Germany that exports lots of stuff to Russia and the Middle East, the positive effect is probably quite small (especially if consumers keep the oil savings in their pockets instead of spending them). And for all major oil-producing countries, it is clearly negative.
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