The Great Plunge in Oil Prices : Causes, Consequences, and Policy Responses
This note combines and distills existing and new research to inform discussion on the topical policy issue of oil prices. Following four years of relative stability at around $105 per barrel (bbl), oil prices have declined sharply since June 2014 a...
| Main Authors: | , , , |
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2015/12/25666189/great-plunge-oil-prices-causes-consequences-policy-responses http://hdl.handle.net/10986/23611 |
| Summary: | This note combines and distills existing
and new research to inform discussion on the topical policy
issue of oil prices. Following four years of relative
stability at around $105 per barrel (bbl), oil prices have
declined sharply since June 2014 and are expected to remain
low for a considerable period of time. The drop in prices
likely marks the end of the commodity supercycle that began
in the early 2000s. Since the past episodes of such sharp
declines coincided with substantial fluctuations in activity
and inflation, the causes and consequences of and policy
responses to the recent plunge in oil prices have led to
intensive debates. This paper addresses four questions at
the center of these debates, with particular emphasis on
emerging market and developing economies: 1) How does the
recent decline in oil prices compare with previous episodes?
2) What are the causes of the sharp drop and what is the
outlook for oil price? 3) What are the economic and
financial consequences? 4) What are the main policy
implications? The decline in oil prices will lead to
significant real income shifts from oil exporters to oil
importers, likely resulting in a net positive effect for
global activity over the medium term. However, several
factors could counteract the global growth and inflation
implications of the lower oil prices. These include weak
global demand and limited scope for additional monetary
policy easing in many countries. The disinflationary
implications of falling oil prices may be muted by sharp
adjustments in currencies and effects of taxes, subsidies,
and regulations on prices. Regarding fiscal policy, the loss
in oil revenues for exporters will strain public finances,
while savings among oil importers could help rebuild fiscal
space. Lower oil prices also present a window of opportunity
to implement structural reforms. These include, in
particular, comprehensive and lasting reforms of fuel
subsidies, as well as energy taxes more broadly. |
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