Scott Sumner  

Falling oil prices have no implications for global growth. Oil production does

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Rising oil production is likely to lead to faster global growth. Falling oil production is likely to lead to slower global growth. That's because oil is an important input into the production process.

However falling oil prices have no implications for global growth---it merely redistributes global wealth.

That's why estimates of US RGDP growth next year at $66/barrel are not much different from what people were estimating at $100/barrel. Global oil output hasn't changed very much.

Might falling oil prices affect AD? Not with monetary offset--the Fed will simply adjust the date at which they start raising rates.

Focus on Q, not P. Oil output helps explain why the world economy slowed in 1974, but boomed in 2007, despite rising oil prices in both years.


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CATEGORIES: Macroeconomics




COMMENTS (18 to date)
David R. Henderson writes:

Scott,
Beautifully succinct. I would edit only one thing. I would say "However falling oil prices per se have no implications for global growth---they merely redistribute global wealth."

JFA writes:

File under "Never reason from a price change"

von Pepe writes:

No discretionary monetary policy here.

bill writes:

I like DRH's addition of per se.

In theory, you should be right about monetary offset. In practice, certain Fed members will be swayed by the lower headline CPI.

James Picerno writes:

Quite true, certainly for global growth. But what are the implications for lower oil prices for specific countries? In particular, is the outlook different for net importers vs. net exporters if prices are sharply lower? Overall, it's a wash on a global basis. But should we expect different outcomes for different countries, if only on the margins?

Scott Sumner writes:

David, I'm fine with that (although not 100% sure it's needed.)

Bill, Probably, but much less than people believe.

James, Probably, but much less than people believe.

Michael Byrnes writes:

James wrote:

"But what are the implications for lower oil prices for specific countries? In particular, is the outlook different for net importers vs. net exporters if prices are sharply lower? Overall, it's a wash on a global basis. But should we expect different outcomes for different countries, if only on the margins?"

I think so, but I think Scott may have covered that in his comment "it merely redistributes global wealth".

Glen writes:

Wow.

Falling oil prices cannot have any effect on oil production, domestic or global. And the [non-formalistic] proof is “estimates of US RGDP growth next year at $66/barrel are not much different from what people were estimating at $100/barrel.”

All because “falling oil prices... merely redistribute global wealth.” But they also lower global oil production when those fixed production costs are now higher than the new lower prices. Which changes global growth. And redistributes it from high-cost to low-cost producers.

Of course, if capital, goods and labor were permitted to flow freely around the globe, lower oil prices would eventually spur other non-oil production growth in high-cost producer countries.

But because that's not the world in which we live, prices still matter. Especially in the now.

Roger McKinney writes:

Glen, agreed! Most US oil production is debt financed. Lower prices will force some banks to stop lending to oil production. Some oil producers won't be able to roll over debt and will default. Some banks will go broke because producers default on debt.

Macroeconomists can't see this micro world. It doesn't exist for them. That's why they're always surprised by recessions.

Lorenzo from Oz writes:

Putin and the Iranian regime are, of course, very concerned about said redistribution of wealth. Indeed, apparent Saudi attempts to:
(1) undermine US shale oil production
(2) undermine Iran
(3) punish Russia for supporting Assad
seem to be behind the fall in oil prices (or, more specifically, the failure of supply to respond quite as one might expect).

Andrew_FL writes:

Where are so many above commenters getting the notion the fall in oil prices is demand driven?

Michael Byrnes writes:

Glen wrote:

"But they also lower global oil production when those fixed production costs are now higher than the new lower prices. Which changes global growth. And redistributes it from high-cost to low-cost producers."

It is oil production, and not oil prices, that affects global growth. Falling prices could be an indication that oil production has risen markedly (good for growth), but since there are other explanations for falling oil prices, the impact of falling prices in and of themselves on growth is not clear.

Nathan W writes:

From an inputs perspective I cannot disagree. Produce more of an input at a lower price and anything which uses this inputs (or substitute) will be cheaper to make.

But in this case, I think the underlying causes have more to do with Saudi strategic decisions which limit the ability of Russia to distribute patronage monies to clients among regional rivals of Saudi, and so it is not correct to assume that economic fundamentals explain either side of the aggregate situation.

A lower oil price will stimulate growth in oil importing areas which use oil to produce things with potential for long-run innovation, etc., whereas the negative distributional impact on producing regions only affects production of a commodity with very mature production technology, and thus probably has a less negative effect on growth conditions than the positive effect. This is nitpicking at the proposition that the changes are merely distributional and will not affect aggregate growth at the international level.

I agree with the logic of the focus on quantity in the role actually played as an input, but I think there will always be a minor element of chicken and egg questioning here in the best of analytical conditions (ten million barrels at $100 means something different than the same ten million barrels at $60, notably that weaker demand conditions would be required for the market to clear at this lower P for the same Q), and the geopolitical situation suggests that there's a little more egg than chicken, if you know what I mean.

Jeff writes:

To the extent that wealth is transferred away from people who fund bad actors like Al Queda and ISIL, it does affect global growth, or it least it lessens the amount of resources that get spent defending against those bad actors.

ThomasH writes:

Scott assumes that oil price fall might not be an excuse to do some crazy monetary policy.

Let's see, the ECB figures that if oil prices fall and inflation does not, it must be because the unseen underlying inflation momentum must be much stronger than they had thought to they raise interest rates as a way of exercising the "precautionary principle."

ThomasH writes:

Maybe no one will believe me but I swear Ihad NOT reaad Scott's post on Money Ilusion whihc contained this:


Seriously, it doesn't matter what the data show, the Germans will always find a reason to favor ever tighter money, ever more deflationary policies.

When I vainly tried to parody ECB (=German) monetary proclivities in the post above.

This shows once again that it is imposible to parody extremism.

dwb writes:

In of itself, (oil prices) you are right.

However, what is likely to happen (which Dudley admits in his latest) is that monetary policy will lean into the disinflation caused by oil price declines. PCE inflation Yr/Yr will probably decline to about 1%, from 1.5%. FOMC will signal easier policy, for a longer period. Which will boost growth. The reverse of the 2008 mistake, of sorts.

The channel for a lot of the impact from lower energy prices is via monetary policy. It should not be so, but that's the world we live in.

So lower oil prices will boost growth, just not the way you think.

Ray Lopez writes:

Schoolchild: "But the Emperor has no clothes"!

Falling oil prices P will not affect Q, production? Perhaps very short term but long term P does affect Q as small drillers have to shudder their rigs. P, Q are linked, Econ 101 stuff. BTW that dip in world energy production you see at the start of the 1970s is due to lack of US demand (since 1969*), as well as the dramatic near tripling of the price of oil, aka Google "the 1973 oil crisis". History 101 stuff.

* The "Recession" of 1969—1970 by Solomon Fabricant, New York University and National Bureau of Economic Research ("There can be no doubt that economic expansion came to a halt in the United States in the Autumn of 1969.")

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