Winners and Losers of Falling Oil Prices

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Emma Brons's picture
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Hello and welcome to my living room.


In Asia who benefits and loses the most from falling oil prices?


In this video, I will highlight briefly information on Asian oil production and consumption, how to identify who benefits and loses the “most”, and why these stakeholders are given an advantage or disadvantage.


The current slump in commodity prices is because of an increase in output and a decrease in demand, due to slowing global economic growth.  Increasing oil prices? Producers win.  Decreasing oil prices? Consumers do.  And many parts of Asia are oil-importing nations.


Producing and consuming oil are two very different matters when it comes to this region.  According to the EIA, only two Asian countries made the top 15 producers in 2012; Russia at number 3 and China at number 4 for a total of 14 million barrels produced per day.  The total consumed in this region is 25 million barrels per day.  Not sustainable.


Declining oil prices paired with increasingly difficult ability to participate in international trade could spell disaster for Russia.  Estimates say Russia’s growth rate will stall at around 0.5 to 2 percent.  With less state spending because of economic hardship, and comparatively lower prices for imports, there will be a significant rise in poverty in 2015.


On the other hand, Russia could see gains in the agricultural industry.  Agriculture is extremely energy intensive – everything from the gas in tractors, to pumping water.  According to the World Bank, a dollar of manufactured goods uses one quarter of the energy needed to produce agricultural goods.  Russia could harness this opportunity to expand its agricultural sector, which composes only 4.2% of the country’s GDP.


I’m using the example of Russia and its benefits, costs, and opportunities, to illustrate the complexity of falling oil prices.


The World Economic Forum has put together a report each year since 2006 that “[calls] attention to global risks that can be systemic in nature, causing breakdowns of entire systems and not only their component parts.”  This risk web is caused by the increasing interconnections created by our increasingly globalized world.  I will use this more objective web to describe system complexities and the most impactful winners and losers of falling oil prices.


The selected topics are from the ten global risks of highest concern in 2014.  Please take time to read the full report – after my video, of course.


The two topics I have selected are severe income disparity and fiscal crises in key economies.


Severe income disparity is defined by the WEF as “widening gaps between the richest and the poorest citizens [that] threaten social and political stability as well as economic development.”  Increasing income disparity, which the world is seeing currently can lead to political instability.  The Gini coefficient, used to measure income disparity, has risen almost 7% in China and Cambodia, almost 4% in India and 2% in Vietnam and Taiwan, according to the Asian Development Bank.


Falling oil prices could curb this disparity.  Lower income households generally spend more on energy-related purchasing, like gasoline for their cars, when compared to higher income homes, increasing consumers’ real income.


Another benefit could be increased wages.  Two main costs to produce a product are wages and oil and when oil prices remain low over a long period of time, companies can increase wages.


The second risk I will talk about is fiscal crises in key economies.  The WEF defines this as “excessive debt burdens [that] generate rising interest rates, inflationary pressures, and sovereign debt crises.”


Of specific concern are the rising subsidies of gasoline and other petroleum products by governments.  According to the IEA, the top Asian spenders on energy subsidies, as a percentage of GDP, are Indonesia, Thailand, Vietnam, Malaysia, and India.


High government subsidies mean fewer dollars spent to bring up the standard of living, which can mean a higher chance of political unrest.


India is taking action to reduce fuel subsidies.  Last year alone, the country spent $23 billion on them.  India’s national debt has decreased since starting to cut subsidies in 2013, as could countries like Thailand and Vietnam, who are following suit.


I would like to point out an opportunity to developing nations.  The Asian model for development was characterized by frugal fiscal governmental policies adopted by  the 4 tigers, South Korea, Taiwan, Hong Kong, and Singapore, and reinvestment back into production infrastructure.  If countries would spend more money on this process and less on subsidies, they could increase the standard of living in the next decade.


It is important to understand that the gains or losses of a country are dependent on governmental policies.  Currently developing countries based in the manufacturing trade will see the most benefit as long as there are policies to support growth, and that Russia will lose a great deal if the government does not take steps to mitigate possible damage.


Thank you for watching my video.


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