The drop in oil prices is giving the world economy a "shot in the arm," IMF economists said yesterday.
Global growth in 2015 could be 0.3-0.7pc higher in 2015 than would have been expected without a crude price decline, IMF simulations suggest.
The IMF, in its October World Economic Outlook (WEO), projected world output would rise 3.8pc in 2015. But that figure did not factor in the full, dramatic drop in oil prices seen this year. Oil prices have fallen 50pc since June and 40pc since September.
IMF head of commodities research Rabah Arezki and research director Olivier Blanchard were quick to point out that the simulations do not constitute an IMF forecast for the state of the global economy in 2015, but rather an early glimpse of possible economic ramifications of the oil price decline on consuming and producing nations alike.
"Overall, lower oil prices due to supply shifts are good news for the global economy, obviously with major distribution effects between oil importers and oil exporters," the economists wrote.
In the US, where oil consumption in recent years has equated to about 3.8pc of GDP, the lower oil prices could push up economic growth by 0.2-0.5pc in 2015 and by 0.3-0.6pc in 2016.
In China's more energy-intensive economy, oil consumption accounts for about 5.4pc of GDP, the report said. Chinese economic output could increase 0.4-0.7pc more in 2015 and 0.5-0.9pc in 2016 than without the price drop.
Countries may try to use the price decline to reduce market-distorting energy subsidies, a policy the IMF has long advocated.
For oil exporters, the lower prices are dealing a blow to their economies, government revenues and currencies. "Oil exporters depend much more on oil than oil importers," the economists said.
Energy accounts for 25pc of Russia's GDP, 70pc of its exports and 50pc of federal revenues. In Equatorial Guinea oil exports account for 80pc of GDP and 75pc of government revenues. And the lower prices likely will force many exporters to rack up fiscal deficits. Saudi Arabia's break-even oil price, the price the country needs to balance its budget, is $106/bl, while for Libya it's $184/bl.
So far, the currency pressures have been limited to a handful of exporting countries, including Russia, Nigeria and Venezuela. The ruble has dropped 40pc so far this year and 56pc since September. "Given global financial linkages, these developments demand increased vigilance all around," the IMF economists said.
Arezki and Blanchard point to supply and demand largely to explain the price decline. They estimate about 20-35pc of the price drop stems from unexpected lower demand. On the supply side, they look to Opec's decision to defend market share rather than price, as well as the faster than anticipated recovery of Libya's oil production and Iraq's ability to continue output despite the unrest there.
They dismissed suggestions the price drop has been caused by speculation or "financialization," in which investors treat oil and other commodities as an asset class. "We see little evidence that this is the case."
They pointed Io IEA's finding that oil inventories have reached their highest level in two years, "suggesting expectations of price increases, not price declines."
Lower oil prices are tamping down upstream investment. The IMF economists pointed to Rystad Energy data indicating that the majors' capital expenditures in the third quarter were down 7pc compared with the same period a year ago. And expenditures are expected to fall "markedly" through 2017.
If prices remain at today's levels, Rystad estimates oil production could decline "moderately," less than 4pc in 2015, the IMF officials said.
"Rates of return will be significantly lower, however, and some highly leveraged firms that did not hedge against lower prices are already under financial stress and have been cutting their capital expenditures and laying off significantly," they said.
Overall, the lower prices are weakening the financial positions of energy companies, particularly those that have borrowed in dollars, as well as banks that do substantial lending in the energy sector.
In emerging countries, about 31pc of energy companies have an interest coverage ratio, the ratio of cash flows to interest payments, of less than 2pc.
"Some of these companies may indeed be at risk," the economists said.
The IMF will issue an update to its WEO in January.
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