Low oil prices have not brought the expected gains yet generated more risks, IMF experts say

Almaty. March 24. Silkroadnews - Persistently low oil prices have not brought the expected economic gains but generated the unexpected new risks, chief economist Maurice Obstfeld and his colleagues Gian Maria Milesi-Ferretti and Rabah Arezki warn, TASS reports.

“Oil prices remain low for much more than a year and a half, yet the “impetus” to the development of the world economy has not yet materialized despite all the expectations. We state, this may sound strange, the global benefits of lower prices are likely to appear only after the prices rise and developed economies achieve more progress in overcoming the current situation with low interest rates,” – the authors suggest.

According to the experts, since June 2014 the dollar oil price fell by about 65% (about $70) and the oil prices in national currencies, “even with a 20-percent rise in price of dollar during this period”, in average fell by more than $60, yet “the growth rates decreased more in a wide range of countries”.

“This surprised many observers, including us here in IMF. Prior to that we believed the oil cheapening would be positive for the global economy as a whole. It is clear that it hurts the exporters, yet the importers’ gain expected was supposed to be more than sufficient as a compensation,” - economists say.

Trying to understand what went wrong contrary to the expectations the experts analyze in details all the supply and demand issues and also point out to such an important factor of the current situation as almost zero interest rates in major oil importers. Under normal conditions, the rise in oil price results in higher inflation and lower growth rates as the rise in energy costs forces the producers to cut their output, lay off people and raise product prices.

Now, in theory, it shall be the other way around: the costs of production are to decrease along with employment increasing and inflation falling.
“However, as soon as the central banks cannot cut the interest rates, this channel runs into a problem. Since the base rate cannot be reduced further, a decline in inflation due to the reduction of production costs brings the higher real interest rates, squeezing demand and, with a strong possibility, “strangling” any increase in output and employment. Moreover, both of these units may even decrease,”- the authors write.

The comments end with a brief outlook. According to authors, “persistently low oil prices complicate the monetary policy and are open to many hazards of further inflation expectations”.
“Moreover, the current episode with historically low oil prices could trigger a number of different failures, including corporate and sovereign defaults. These may affect failures at the financial markets that are already tense. The possibility of such a negative backlash makes it particularly urgent for the international community to support the demand as well as a series of structural and financial reforms in specific countries,” - the experts say.