2016 : A CHANGING LANDSCAPE – OIL AND REFUGEES: ASSESSING COSTS AND BENEFITS
The uncertain implications of the oil price decline
The price of oil has dropped below $30 a barrel reaching its lowest since 2003. To the question “Can it go any lower?,” the International Energy Agency has answered with an “emphatic yes”.
A supply-driven decline? The oil price decline has been interpreted as a result of OPEC’s decision to sustain production level despite declining demand. For Free exchange, this is an attempt to drive competitors out of the market. However, the production in North America has been far more resilient to low prices than expected. US shale drillers, OPEC’s decisions, Iran’s reentry in international markets (Mark Shenk on Bloomberg) lead the IEA to predict over-supply of about 1 mb/d. (IEA report), with a further rise of 700,000 b/d in global inventories before supply and demand begin to balance out in 2017 (The Economist).
A demand-driven worry? Fearing that the decline is rooted in a fall in global demand, investors sent stock prices down (Alan Soughley on Bloomberg)—which could be self-fulfilling according to Olivier Blanchard on VoxEU. Among other reasons, demand-driven worries have been fueled by concerns over Chinese growth (The International Energy Agency report), a deceleration of manufacturing in the U.S. and extremely mild winter temperatures (Greg Sharenow).
The non-linear benefits of oil price declines. Oil prices declines were considered to be expansionary before through two channels, described by Paul Krugman: (1) the reduction of inflation, allowing central banks to conduct expansionary monetary policy to stimulate the economy, and (2) the redistribution of income away from agents with low marginal propensities to spend toward agents with high marginal propensities to spend (Zachmann on Bruegel). However, Krugman argues that these channels do not apply to important declines of oil prices, especially that inflation is very low everywhere and that investment spending is closely tied to oil prices—magnifying the negative impacts on oil exporters and oil-related sectors.
Does the fall in oil prices really benefit oil-importing countries? Traditionally, it is believed that oil prices fall can boost the economy through the consumption channel. The IEA reports that many importing countries, such as India, Egypt and Indonesia have been able to slush fuel subsidies worth almost $500B in 2014. Jérémie Cohen-Setton writes that the traditionally positive impact on oil importing countries may be different in the current environment. Kadhim Shubber (FTAlphaville) sees the benefit of lower oil costs for emerging market importers as outweighed by the negative impact of the energy industry collapse - that is to say the reverse in petrodollar flows and the decrease appetite for risky EM assets. Ye Xie writes out that capital outflows will more than offset the cost savings from cheaper import bills for countries such as Turkey and India, undermining economic growth. Erik Nielsen (Unicredit) comments on the unusual positive correlation between oil prices and equities, explained by three facts: (i) oil prices reflect weak future global GDP growth; (ii) big price declines result in problems for the energy industry, along with geopolitical implications, which overpower the positives; (iii) lower prices increases the risk of damaging deflation. Nielsen argues that all three are not backed by historical evidence nor very likely—but also that this complicates the ECB’s task, and make an additional stimulus the only credible policy option.
Inflation expectations. For Gauti Eggertsson, the oil price decline is generating an overall pull downward in current and expected inflation, thus effectively making monetary policy more restrictive around the world by increasing real interest rates. Darvas et Al. (Bruegel) write that low oil prices drag down inflation expectations up to 5-6 years ahead, which is puzzlingly long and suggests that financial market-based inflation expectations should be assessed cautiously.
Europe’s refugee crisis: High Risks High Returns?
Economic benefits from refugees. A new IMF study on refugees in Europe argues that quick labor market integration can unlock the potential economic benefits of the refugee inflow. Supporting policies range from making labor markets more flexible to tailoring introductory programs that aim to overcome lack of information, poor access to informal networks and low language proficiency. Kim Wellmann (EUROPP) writes that swift integration policies could help address demographic issues within EU economies, especially for Spain and Sweden, and promote inclusive growth.
Integration-related fiscal costs. The German Council of Economic Experts shows that integration benefits for asylum seekers and recognised refugees will result in a direct fiscal impulse of about 0.3-0.5 % of GDP in 2016. For Fratzsher and Junker, these fiscal costs will be mitigated by positive effects in the long run (Bruegel). In Davos, Mario Draghi recommended more spending by governments to make the influx of refugees into Europe a stimulus for growth. “One driver of the economy, which still hasn’t deployed its effect, is the probable increasing government expenditure to cope with the refugees” (WEF).
Robert Shiller calls for more economic research to back up Europe’s refugee crisis-related findings and to be able to draw some conclusions (Project Syndicate).
Political implications. Divisions run high in the EU over refugee policy, as highlighted at the recent interior minister meeting in Amsterdam (Citi): (i) the deals with Turkey have not reduced refugee numbers as expected, while EU countries have not yet agreed on funding for the €3bn of aid promised; (ii) criticism for Greece’s handling of arriving refugees—with some suggestion that the country could be (temporarily) ejected from the Schengen agreement (see EuroIntelligence); countries (Austrian (EuroIntelligence), Balkans) capping their refugee intake; temporary border controls within the EU (Sweden, Denmark, Germany, Austria). With lacking solidarity between EU members on the refugee crisis, three proposals (Bloomberg) are brought forward: ending the Dublin role, setting refugee quotas, and rewriting the 1951 Refugee Convention. For Berthold Kohler (FAZ) the perspective of a “Plan C”— that the EU survives the refugee crisis only as a deeply divided community—is a reality, while Wolfgang Schäuble (Spiegel) warns that time is running out to find a solution.
