Oil price movements have less impact on global demand now than a decade ago, Capital Economics said in a note this week, pointing to three key changes: oil producers’ spending, U.S. shale producers and easier central bankers.
Oil prices have certainly trended higher recently, propelled by a combination of higher demand, less of a supply glut, and geopolitical concerns ranging from Iran to Venezuela.
Nymex WTI crude oil futures were at US$70.93 a barrel at 9:26 P.M. SGT on Wednesday, while ICE Brent futures were at US$77.87, according to Bloomberg data.
1. Oil producers’ spending
The conventional wisdom has been that high oil prices transfer income from net oil consumers to net oil producers, such as the Gulf states, tend to have high savings rates, Capital Economics noted. But that conventional scenario may no longer be accurate, it said.
“The assumption that producers use their marginal revenue to top up their sovereign wealth funds now looks out of date. Indeed, Saudi Arabia, which has been implementing austerity since 2015, has already begun to loosen fiscal policy,” the note said. “What’s more, the
world’s major oil exporters do not actually seem to have unusually high savings ratios.”
2. U.S. shale producers
The second reason the global economy is less sensitive to higher oil prices comes from U.S. shale producers, which can ramp up investment faster than conventional oil players, it said.
“Their time horizon is much shorter and it takes less time to begin pumping oil. The resulting increase in mining investment will help to support global demand when oil prices rise,” Capital Economics said.
3. Easier central bankers
Central bankers were also less quick to push the interest rate button now than in previous decades, the note said.
“Increases in oil prices still have a big impact on inflation but the fact that inflation, and inflation expectations, have been so low and stable for more than a decade means that policy-makers are less concerned about second-round effects,” it said.