BNY Mellon: Commentary on the drop in oil prices

March 9, 2020

By Shamik Dhar, Chief Economist at BNY Mellon Investment Management

The oil price collapse is yet another shock for fragile economies and markets to cope with – all against the background of turmoil in financial markets generally.  Demand for oil had been weak anyway due to the impact of coronavirus, so Saudi Arabia’s decision to turn on the taps layers a supply shock on top of that.  It’s hard to say how long this will last, but it doesn’t look like a short-lived development at the moment. 

The oil price fall will help support growth in oil-importing countries, which will enjoy a terms of trade gain. There is a transfer of income from oil producers to oil consumers, and that could boost global growth if the consumers spend more from their income gains than producers cut spending. Every $10 fall in oil prices transfers around 0.3% of world GDP from producers to consumers.

The boost is unlikely to be large enough to stabilize a world economy faltering from the impact of Covid-19, but low oil prices could prove a favourable environment once the impact of the virus has passed later this year.  The oil price fall also boosts market uncertainty – and obviously today’s events demonstrate there’s a lot of fear about already.  A sharp slowdown in world growth this year looks likely, possibly even global recession in the first half.  One ‘bright spot’ is that global carbon emissions could well fall this year, though again, at the margin, the oil price fall will moderate that reduction a bit.