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Decline in oil price will delay oil investments, but it may also boost the global economy

17. desember 2014

Oil-drilling-platform-082009-99-0269-1500By senior advisor Pål Aslak Hungnes, Innovation Norway.

Goldman Sachs warns that almost $1tn of future investment in the oil business is at risk after the brutal plunge in crude prices to around $60 a barrel. Since the North Sea is a rather expensive region to produce oil in, beaten only by oil sand in Canada and deep ocean in the Mexican Golf, one should ask how far down oil-investments in Norway will fall. The latest figures from Statistics Norway indicate only a modest decline next year (minus 15-20 pct). Are they being too optimistic? The levels of investments are still very high.

The decline in oil prices in recent months is on the other hand perhaps the growth stimulus as the global economy was waiting for? In practice, it works much like a global improvement in productivity. As a matter of fact, it represents a transfer of wealth from the oil-producing countries to the oil-consuming countries.

Chief economist in our sister organization Business Sweden, Mauro Guzzo, estimate a total of $2tn are to be “transferred” from oil producing to oil consuming countries, due to the price fall. Instead of being saved in sovereign wealth funds, it might end up in the pockets of the households in US, Europe and Asia. In particular, a number of populous emerging countries such as India, Indonesia, Thailand, the Philippines, Turkey, South Africa, Colombia and others, acquire a growth stimulus and money that could be used for other imports than oil.

But, of course, if the price fall is caused by an underlying downturn in the world economy, not only an increase in oil supply, then the outcome is more uncertain. New figures from the manufacturing business in China, the world’s biggest oil-demander, might suggest there a coming downturn in the world economy as well.  So, the only sure thing is that nothing is.

If we are optimistic and believe in an upcoming boost, we should ask how to prosper on this potential boost for the world economy in a sustainable way? Innovation and restructuring is needed more than ever.


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