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The Great Plunge in Oil Prices: Causes, Consequences, and Policy Responses

Author

Listed:
  • John Baffes
  • M. Ayhan Kose
  • Franziska Ohnsorge
  • Marc Stocker
Abstract
This note combines and distills existing and new research to inform discussion on the topical policy issue of oil prices. Following four years of relative stability at around $105 per barrel (bbl), oil prices have declined sharply since June 2014 and are expected to remain low for a considerable period of time. The drop in prices likely marks the end of the commodity supercycle that began in the early 2000s. Since the past episodes of such sharp declines coincided with substantial fluctuations in activity and inflation, the causes and consequences of and policy responses to the recent plunge in oil prices have led to intensive debates. This paper addresses four questions at the center of these debates, with particular emphasis on emerging market and developing economies: 1) How does the recent decline in oil prices compare with previous episodes? 2) What are the causes of the sharp drop and what is the outlook for oil price? 3) What are the economic and financial consequences? 4) What are the main policy implications? The decline in oil prices will lead to significant real income shifts from oil exporters to oil importers, likely resulting in a net positive effect for global activity over the medium term. However, several factors could counteract the global growth and inflation implications of the lower oil prices. These include weak global demand and limited scope for additional monetary policy easing in many countries. The disinflationary implications of falling oil prices may be muted by sharp adjustments in currencies and effects of taxes, subsidies, and regulations on prices. Regarding fiscal policy, the loss in oil revenues for exporters will strain public finances, while savings among oil importers could help rebuild fiscal space. Lower oil prices also present a window of opportunity to implement structural reforms. These include, in particular, comprehensive and lasting reforms of fuel subsidies, as well as energy taxes more broadly.

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  • John Baffes & M. Ayhan Kose & Franziska Ohnsorge & Marc Stocker, 2015. "The Great Plunge in Oil Prices: Causes, Consequences, and Policy Responses," Policy Research Notes (PRNs) 94725, The World Bank.
    • Handle: RePEc:wbk:wbkprn:94725
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    employment; merchandise; capital markets; durable goods; nuclear reactors; oil price; price increases; oil equivalent; fossil fuels; oil markets; stock; quality energy ... See More + world oil consumption; market developments; deflation; oil spills; price forecasts; activities; average prices; oil output; oil supply; clean energy; gas prices; gasoline; energy products; fair; oil price collapse; oil exploration; pricing; gas; ethanol; barrels per day; price; peak oil; domestic oil; oil consumption; oil production; inflation; stable prices; oils; labor market; petroleum; oil prices; lng; natural gas prices; oil demand; liquefaction; agricultural commodities; oil; barrel oil; energy sources; substitute product; raw materials; petroleum exporting countries; oil accounts; oil companies; domestic supply; surplus; products; options; oil products; crude oil production; emerging market; recoverable reserves; markets; oil imports; agricultural prices; product; tax revenues; price subsidies; inventories; fuel demand; pricing policies; inventory; fuels; fuel costs; commodity price; tax policies; price change; expenditure; emerging markets; pricing mechanism; energy consumption; gas projects; substitute; climate change; volatility; balance; oil producer; market conditions; merchandise exports; utilities; power; electricity; price of oil; price support; demand; aggregate demand; price stability; price changes; fossil fuel; expenditures; oil exports; price fluctuations; oil producers; fuel prices; cost of energy; energy bills; energy use; consumption of energy; market; net oil; nuclear energy; energy prices; coffee prices; energy production; crude oil price; natural gas; market share; feedstock; financial market; sugarcane; stocks; oil exporters; domestic oil production; investment; nitrogen; coal; financial markets; supply; crude oil; fuel; oil shocks; drilling; prices of energy; availability; oil price spike; investments; domestic petroleum; renewable energy; suppliers; price spikes; labor markets; diesel; commodity prices; oil industry; energy costs; fossil; prices; approach; electrical power; energy;
    All these keywords.

    JEL classification:

    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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