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Cheap oil will fuel global economy: World Bank

By Ahmed Kaludi   /   Tuesday, 16 Dec 2014 10:20AM   /   Leave a Comment   /   Tags: ,   /   1720 views
oil barrel
Oil prices have more than halved from their 2014 peak. Photo: Bloomberg

The slump in oil prices is set to boost the global economy, with crude-importing countries expected to substantially benefit, says the World Bank.

A 10 per cent drop in oil prices would increase gross domestic product in oil-importing countries by 0.1 percentage points to 0.5 percentage points, World Bank research said.

Oil has slipped more than 50 per cent since its 2014 peak, and while the World Bank scenario cannot simply be multiplied, economic growth in oil-importing countries is likely to see a significant boost.

The World Bank’s most recent forecast for global growth in 2015 came out in October, predicting a rise of 3.2 per cent. The bank will release a revised forecast on January 13.

In China, a 10 per cent drop in oil is expected to lift the growth by 0.1 to 0.2 percentage points, so the current slump will likely boost the world’s second-largest economy strongly.

Fund manager BlackRock said in its 2015 outlook that a $US25 fall in oil prices could lead to an uptick of 0.5 percentage points in Chinese GDP. According to BlackRock, the GDP effect on Australia is negligible.

In China, oil accounts for just 18 per cent of energy consumption, while 68 per cent is coal – yet the country is still the world’s second-largest oil importer. The most oil-dependent sectors in China are transportation, petrochemicals and agriculture.

The World Bank estimates that sustained low oil prices in 2015 will widen China’s current account surplus between 0.4 and 0.7 percentage points of GDP.

In other developing economies, lower oil prices can reduce governments’ need to provide fuel subsidies and thus bolster their coffers.

Developing oil-importing economies such as Brazil, India, Indonesia, South Africa and Turkey will all see lower inflation and a reduction in current account deficits thanks to cheap oil.

However, a slowdown in growth from oil-exporting countries could have knock-on ramifications for other emerging and frontier economies, the World Bank warned.

“The flow of so-called ‘petrodollars’ has boosted financial market liquidity, and helped keep borrowing costs down over the past decade,” The World Bank said.

“If oil prices remain low, repatriation of foreign assets could generate capital outflows, and potential financial strains for countries that have become reliant on ‘petro-dollar’ inflows.”

Cheap oil is likely to boost real growth in major economies this year and strengthen calls for monetary stimulus measures in weaker ones, fund management firm Black Rock said.

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