File photo of a section of the BP Eastern Trough Area Project (ETAP) oil platform is seen in the North Sea, around 100 miles east of Aberdeen in Scotland Feb. 24.Andy Buchanan/Reuters
The near-halving of oil prices – and the growing consensus that new technology that facilitated the boom in U.S. production will keep prices lower for longer – will have pronounced but disparate effects on economies around the world.
In a new report, Credit Suisse analysts James Sweeney and Axel Lang examine how this extreme shift in prices will transfer wealth to and from different countries.
Their primary conclusion: an enduring decline in oil prices "means the rich countries just got richer."
Credit Suisse affirms that the decline in oil prices was a supply-side story, not one of slumping demand. With the benefit of hindsight, we now know that global growth was picking up steam amid the collapse in crude prices.
Mr. Sweeney and Mr. Axel's case is grounded in an explanation of how a country's balance of trade in oil affects activity throughout the economy and influences its aggregate financial holdings.
"Net importers pay for oil by borrowing from foreigners, selling assets, or cutting spending on other things. Net oil exporters accumulate foreign assets or increase their domestic demand or spending on non-energy imports," they write. "Many oil exporters have run persistent surpluses that led to large net holdings of foreign assets."
The vast foreign exchange reserves of Saudi Arabia, the largest oil exporter in the world, are proof of this dynamic.
Simply, the residents of countries that are now able to spend less money importing oil have more money to spend on other discretionary purchases.
In the short-run, the analysts note, tumbling oil prices can appear to be negative even for oil-importing countries. That point was drilled home Wednesday morning in the wake of the poor U.S. GDP figures for the first quarter, as spending on mines and wells plunged at an annualized rate of nearly 50 per cent.
But the longer-term implications of lower oil prices appear to be clear.
"In general, the developed world will be richer if oil prices are lower, all things being equal," write Mr. Sweeney and Mr. Axel. China and India, two massive oil-importing countries, will also reap significant benefits if prices do indeed settle at a lower equilibrium, while other emerging markets will be adversely affected.
Private domestic wealth (the assets owned by individuals within a country) is typically considerably larger than the net international investment position (the difference between the foreign assets a nation owns and domestic assets owned by foreigners), suggesting that the benefits of lower energy prices for wealthy economies will be even larger than anticipated, the analysts add.
"Accounting measures of private wealth are much larger than measures of international wealth," they write. "And both are likely to miss or understate the full benefits of a persistent drop in future energy bills for importing economies."
For Canadians, however, the drop in oil prices is nothing but bad news – the nation is the one exception to the rule that lower oil prices leave the developed world better off, according to Credit Suisse.