Affected by multiple factors, international oil prices have fallen sharply recently. Analysts believe that falling oil prices may be a double-edged sword for the global economy. Falling oil prices help crude oil consuming countries reduce costs and stimulate consumption and economic growth; however, for crude oil exporting countries, falling oil prices expose these countries' economies and finances to huge risks.
Why oil prices have fallen
International oil prices have fallen sharply recently, and the general market view is that it is caused by the oversupply of global crude oil. On the one hand, the world's major oil-producing countries are stepping up production; on the other hand, global economic growth is slowing down, suppressing demand for crude oil.
On the supply side, benefiting from the development of shale oil and gas technology, U.S. crude oil production continues to rise. Data from the U.S. Energy Information Administration shows that in the week ending October 3, the average daily crude oil production in the United States reached 8.88 million barrels, the highest level since 1986.
The monthly crude oil market report released by the Organization of the Petroleum Exporting Countries pointed out that OPEC crude oil production reached 30.47 million barrels per day in September, an increase of 402,000 barrels from the previous month and the highest level since August 2013. Currently, OPEC crude oil production accounts for about one-third of the global oil market share.
On the demand side, the expected slowdown in global economic growth has suppressed demand in the crude oil market. The International Monetary Fund recently released a report, lowering its global economic growth forecast for 2014 and warning that economic downside risks are intensifying. The report lowered the global economic growth rate this year to 3.3%, and slightly lowered the global growth forecast for 2015 to 3.8%.
In addition, analysts believe that the oil production and export volumes of Iraq, Iran, and Libya have increased, which has also contributed to the decline in international oil prices. At the same time, the global economy has not yet completely emerged from the shadow of the 2008 economic crisis. The United States and the European Union are facing a series of difficulties in the field of economic development, which has limited the rise in international oil prices.
Good or bad
For the global economy, falling oil prices may be a double-edged sword.
On the one hand, low oil prices can help crude oil consuming countries reduce costs and promote consumption and economic growth, which is a good thing. Taking the United States as an example, consumption is one of the most important economic driving forces in the United States. The decline in gasoline prices will help American households increase their consumption expenditure on other commodities and stimulate economic growth.
For China, the fall in international oil prices will reduce crude oil import expenditures, which will help reduce inflationary pressure, and related manufacturing industries will also benefit from lower costs.
In the past, high oil prices have benefited many oil-producing countries and accumulated huge wealth. But the economies of these countries are closely tied to oil prices. After the sharp drop in oil prices, the economies and finances of crude oil exporting countries may face greater risks.
For Russia, because its fiscal budget is based on the original oil price, the continued decline in oil prices may lead to a sharp drop in fiscal revenue. In addition, falling oil prices will also cause chaos in the stock market and trigger capital flight. The result may be an increase in domestic inflation, higher prices, and curbed consumer demand.
In the near future, against the background of falling oil prices and Western sanctions, the risks of Russia’s economic operation have increased, and this is also the main reason why many international financial institutions have lowered their economic growth expectations for Russia. Some observers, including Russian experts, believe that some countries led by the United States are driving down oil prices to bring down the Russian economy and trigger political and social turmoil in Russia.
How should crude oil exporting countries respond
In response to the drop in oil prices, Russia has taken an important measure to devalue the ruble. This year, the Russian ruble has depreciated by roughly the same amount as oil prices.
Since international oil transactions are settled in U.S. dollars, the ruble income from Russia’s oil exports is basically unchanged. However, a sharp depreciation of the ruble may also lead to increased inflation and massive capital flight in Russia.
In addition, the Russian government recognizes that it must take measures to strengthen the protection of national energy security. Russian Prime Minister Medvedev pointed out that the oil and gas industry is the foundation of the Russian economy. At present, special attention should be paid to the use of new technologies in the exploration and development of oil and gas resources to ensure the leading position of the Russian oil and gas industry in the world.
Russia has approximately US$500 billion in foreign exchange reserves, and reserves funds are set aside in the annual fiscal budget to deal with risks faced by economic development. In addition, Russia has also realized that over-reliance on energy exports is unreliable, and its efforts to change the economic growth structure are also increasing.
As one of the major oil-producing countries in the Middle East, Saudi Arabia does not want oil prices to fall further, but it is also unwilling to unilaterally reduce production and hopes to reduce production together with other OPEC members. Analysts believe that Saudi Arabia wants to use low prices to force Western oil companies to reduce production in order to expand market share. In particular, low prices can inhibit the process of other oil-producing countries such as the United States increasing production through shale oil and gas technology and other means.