Gains from low oil prices can be substantial for developing-country importers if supported by stronger global growth, says a World Bank Group analysis of the oil price decline, contained in the latest edition of Global Economic Prospects.
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 (OPEC), and appreciation of the U.S. 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.
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.
“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.
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.
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.
“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,” adds Ayhan.