Lower Oil Prices: Zero Stimulus to US Economy lweb.es/f1442 10.2.2016
OEF REVIEW:The Brookings report “Lower Oil Prices and the U.S. Economy: Is This Time Different?” explores the effect on U.S. real GDP growth of the sharp decline in the global price of crude oil and hence in the U.S. price of gasoline after June 2014. This decline produced a stimulus of about 0.7 percentage points of real GDP growth by raising private real consumption and an additional stimulus of 0.04 percentage points reflecting a shrinking petroleum trade deficit. However, the net stimulus since June 2014 has been effectively zero. No evidence of an additional role for frictions in reallocating labor or the price of gasoline in explaining the sluggish response. Neither was there evidence of lower oil costs stimulating other business investment, nor an increase in household savings, nor of households deleveraging.
High regional gas prices in South America, most notably Argentina, are attracting US exports of domestically produced LNG, with more than 70% of landed cargoes arriving on the continent so far this year. South America has offered the most profitable destination for US exports compared with Europe, the Middle East and Asia. Regional gas markets, particularly in Argentina, are experiencing elevated prices. In an effort to stem the decline in gas production, the Argentine president cut domestic subsidies in December. His administration hopes that higher wellhead prices will revive production in older fields and stimulate new production, particularly in the Vaca Muerta Basin where large untapped volumes remain locked in shale and tight gas reservoirs. In March and April the first and second US cargoes to arrive in South America landed in Brazil, and since April, all eight US cargoes exported to the region have landed in the Southern Cone nations of Argentina and Chile.
OEF REVIEW:China’s crude oil output is at a 6-year low as the country’s state-run energy companies continued to pump less from aging, high-cost fields. Production during August dropped 9.9 percent and during the first eight months of the year output dropped 5.7 percent. The country is forecast to lead production declines across Asia, helping tighten the global market as the world’s largest consuming region relies more on overseas supplies. China’s imports rebounded last month to the highest since April. Nomura Holdings Inc. in Hong Kong pointed out that ”China’s crude output won’t see an apparent rebound unless Brent recovers to $60 a barrel level, as most of China’s aging oilfields can’t make a profit below this price,” adding that ”Massive capital expenditure cuts have translated to more oil supply destruction.”
OEF REVIEW:According to the IEA the oil glut in global oil markets will persist into late 2017 as demand growth slumps and supply proves resilient. Stocks of oil in OECD countries are swelling to levels never seen before. The combination of faltering demand and increased OPEC output pushed oil inventories in developed nations to a record in July. BNP Paribas considers that “OPEC’s long game got a little longer”, and also with regard to OPEC Petromatrix GmbH says that the organization is “trapped” since “Non-OPEC supply has been able to adjust better than expected to the lower oil prices.”