Soft oil prices are expected to persist in 2015 and will be accompanied by significant real income shifts from oil-exporting to oil-importing countries.
Major oil importing countries in particular and the developing nations in general are to benefit from the steep fall in global oil prices, but presents a big challenge to the major oil exporting nations, World Bank has said in its latest edition of Global Economic Prospects.
Soft oil prices are expected to persist in 2015 and will be accompanied by significant real income shifts from oil-exporting to oil-importing countries.
For many oil-importing countries, lower prices contribute to growth and reduce inflationary, external, and fiscal pressures, said the report released by the Bank yesterday.
However, weak oil prices present significant challenges for major oil-exporting countries, which will be adversely impacted by weakening growth prospects, and fiscal and
external positions, it said, adding that if lower oil prices persist, they could also undermine investment in new exploration or development.
"This would especially put at risk investment in some low-income countries, or in unconventional sources such as shale oil, tar sands, and deep sea oil fields," the report said.
The decline in oil prices reflects a confluence of factors, including several years of upward surprises in oil supply and downward surprises in demand, receding geopolitical risks in some areas of the world, a significant change in policy objectives of the Organization of the Petroleum Exporting Countries, and appreciation of the US dollar.
Although the relative strength of the forces driving the recent plunge in prices remains uncertain, supply related factors appear to have played a dominant role, the bank said.
"For policymakers in oil-importing developing countries, the fall in oil prices provides a window of opportunity to undertake fiscal policy and structural reforms as well as fund social programs," said Ayhan Kose, Director of Development Prospects at the World Bank, said.
"In oil-exporting countries, the sharp decline in oil prices is a reminder of significant vulnerabilities inherent in highly concentrated economic activity and the necessity to reinvigorate efforts to diversify over the medium and long term," Kose said.
The report said oil price declines generate changes in real income benefiting oil-importers and hurting oil-exporters.
A 10 per cent decrease in oil prices could raise growth in oil-importing economies by some 0.1–0.5 percentage points, depending on the share of oil imports in gross domestic product.
Their fiscal and current accounts could also see substantial improvements.
On the other hand, it would affect oil-exporting countries adversely.
Empirical estimates suggest that growth in some oil-exporting countries could contract by 0.8–2.5 percentage points in the year following a 10 per cent decline in the annual average oil price.
The slowdown would compound fiscal revenue losses in these countries as fiscal break-even prices exceed current oil prices for most oil exporters.
In some countries, the fiscal pressures can partly be mitigated by large sovereign wealth fund or reserve assets, the report said.
According to the Bank, declining oil prices present an opportunity to reform energy taxes and fuel subsidies, which are substantial in several developing countries, and reinvigorate reforms to diversify oil-reliant economies.
"Egypt, India, Indonesia, Iran, and Malaysia already implemented subsidy reforms in 2013 and 2014.
“Fiscal resources released by lower fuel subsidies could either be saved to rebuild fiscal space lost after the global financial crisis or reallocated towards better-targeted programs to assist poor households, and critical infrastructure and human capital investments," it said.
To offset the incentives for increased oil consumption as oil prices decline, policymakers could modify tax policies on the use of energy, especially in countries where fuel taxes are low.
For oil-exporters, the sharp decline in oil prices is also a reminder of the vulnerabilities inherent in a highly concentrated reliance on oil exports and an opportunity to reinvigorate their efforts to diversify, it said.
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