How Does the Changing Price of Oil Affect Economies around the World?

Experts from the Global Network for Advanced Management weigh in on how fluctuating oil prices affect the economy in their home countries.

During the past decade, the price of oil has traveled from $60 per barrel to a peak of $146 in 2009 and subsequently descended again to below $50 in 2015. While oil is sold in a global market, the effect of rising or falling prices can be very different for importing and exporting countries. Global Network Perspectives asked experts across the Global Network for Advanced Management how the changing price of oil impacts their economies.


Julia von Maltzan Pacheco, Professor and Associate Dean for International Relations, FGV Escola de Administração de Empresas de São Paulo

The oil price matters in Brazil for various reasons. First of all, Petrobras based its pre-salt investment projects on the projections of higher oil prices. Calculations state the cost of producing pre-salt oil between US$41 and US$57 per barrel. Last Friday, the price of Brent approached the grim US$41 floor.

Petrobras, being the largest indebted oil company in the world, already had to revise significantly its investment plans, not only due to the declining oil price, but also due to the ongoing corruption scandal (estimated US$2 billion), which triggered Petrobras’ rating downgrade.

This significant slowdown in its investment strategy (plans were basically sliced by half) will not only harm future output of Brazil’s oil production and consequently reduce world production significantly 10 to 15 years onwards, but it will also decelerate sharply growth in industries and the construction sector, linked to the Brazilian oil production. With the current recession (expected minus 2% to 2.5% for 2015) this loss of potential employments comes really at a bad time. Besides, let’s not forget Petrobras’ foregone receipts earmarked for Brazilian education system that needs urgently substantial and effective investment in order to raise significantly Brazil’s low productivity level.

On the other hand, since 2006 the Brazilian government has subsidized petrol prices to curtail inflation. In 2011-13 the subsidy cost amounted to an estimated 48 billion Reals. So, falling oil prices help the troubled company to recover its losses accumulated over the past and allow the government to cut subsidies at times where it has to generate a primary fiscal surplus. However, the depreciating Real might become the counterproductive factor in this equation, as import prices are rising in terms of domestic currency. 


Lihong Yang, Assistant Professor of Economics, Department of Trade & Economics, School of Business, Renmin University of China, Beijing

Since China replaced the United States as the world's largest net oil importer two years ago, the recent falling oil price may affect the China economy in various different ways, in particular when China is undergoing a period of rapid economic slowdown now. First, as the world’s second largest economy, the strong Chinese economic growth has been a major driving force for the global economy for many years. While the major indicators of the second quarter in 2015 show that China’s economic growth has stabilized, a wide agreement is that China is going through a slowing of growth and is flirting with recession. The falling oil price may help stimulate growth in China and bolster economic growth especially in the industrial investment field. Second, if the declining trend in oil prices continues, since more than half of domestic oil supply depends on imports, the falling oil prices will translate into huge foreign exchange savings for China. Moreover, at the industrial level, low oil prices may not only bring down business expenditures for downstream industries, such as logistic companies and airline industries, but also affect prices on agricultural products as well. This will in turn benefit the consumer sectors as lower inflation raises consumption through higher disposable incomes.


Jens Weinmann, Program Director at ESMT

The German economy heavily depends on car manufacturing, so the oil price may be considered a crucial determinant in Germany’s wealth.

A lower oil price accelerates car purchases of the emerging global middle class. The BP Energy Outlook 2035 predicts that the global vehicle fleet will more than double from today until 2035. According to the OECD, the Asian middle class will have risen from around 600 million today to 3 billion by 2035-45. Hence, there is a massive upside potential for German car makers to sell their products in Asia and other regions, especially Latin America, and eventually Africa.

A higher oil price favors fuel-efficient cars. In this field the German car industry is at the forefront of innovation. In particular, the premium car manufacturers invest heavily in new technologies because of the European Union’s binding emission targets for new cars.

In the longer term, the oil price will become less relevant, because the global vehicle fleet will increasingly switch from combustion engine vehicles to cars with electric drivetrains, fueled by cheap solar and wind energy. Most German car makers have realized this fundamental technological shift and taken action to enter this nascent market.


Julia von Maltzan Pacheco, Professor and Associate Dean for International Relations, FGV Escola de Administração de Empresas de São Paulo

The collapse of oil prices (to levels below $50 per barrel) since late last year has logically benefited countries that consume oil, oil products, gasoline, and other derivatives, and has hurt oil-producing countries by reducing their income from sales. In the case of Mexico, this situation is exacerbated by the continuing decline in oil production by Pemex, the state-owned oil company that has held a more-than-seven-decade monopoly (in 2014 Pemex reached its lowest extraction volume since 1986).

The negative impact from the collapse in oil prices will be greater in Mexico than in other exporting countries because lower oil revenues decisively affect Mexican public finances (more than 30% of which depend on oil income). The inevitable cut in federal and sub-federal public spending may affect Mexican business due to a lowering of the number of public contracts available, as well as the impact from delays in payments to government suppliers, among other negative effects. Many analysts estimate that GDP growth in Mexico could decrease by half a point this year due to the drop in oil prices.

The good news is that the foundation for change is already in place, with the Energy Reform approved by the Mexican government last year, which opens the state monopoly to private investment and competition, making Mexico attractive to investors in energy sector industries and sub-industries. Although Mexico is arriving 20 years late to this growing and increasingly competitive market, the benefits of this paradigm shift will be evident. The Energy Reform means foreign direct investment, technology, and advanced practices not previously available to Mexico, along with final pricing that reflects the true cost of production. It will also allow for the modernization of Pemex and the entire oil and oil derivatives production chain.

However, it is necessary to ensure proper implementation of the Energy Reform to achieve the expected results, especially in the case of oil, where the drop in prices is acting as a disincentive in the process. One example is the recent auction of oil plays in risk-sharing production projects, from which 28 bids yielded just a single company being awarded two oil fields. Despite these disappointing results, both the Mexican government and the business community have high expectations that improved incentives aligned with international best practices will enhance the attractiveness of the next rounds.

Rules and regulations can always be improved upon and adapted to the reality of the marketplace. So far, the efforts made by the Mexican government to successfully implement the reform seem to be going in the right direction, and the stakeholders involved in the process expect that these efforts will contribute to triggering the energy potential of Mexico and its competitiveness in the international arena.


Doyin Salami, Economist and Professor, Lagos Business School

The changing price of oil has caused Nigeria’s current account balance to fall by 69.3% (from N$3.14 trillion in 2013 to N$964.6bn in 2014). In Q1 2015, Nigeria recorded a current account deficit of N$723.8 billion, down by 212% from surplus of N$641.39 billion in Q1 2014. The CBN has devalued the currency twice in the space of one year as a result of falling oil prices. Oil revenue, which accounted for 67% of the gross federal revenue in Q1 2015 (compared to 72.5% in Q1 2014) has also been on the decline. Earnings from oil is the major source of foreign reserve in Nigeria. The foreign reserve was $29.01 billion at the end of H1 2015. So far, it has fallen by 22.3% since H1 2014—$37.3 billion when oil prices started falling. If the economy is not well diversified, Nigeria’s economy will continue to be affected by the changing price of oil in the future as the future of oil prices gloom.


Werner Antweiler, Associate Professor, Sauder School of Business

Professor Werner Antweiler has written a series of blog posts explaining his research into how gas prices in Vancouver, Canada, relate to oil prices. In his most recent post, he notes that gas prices are currently higher than the level predicted by his model. 

What explains the discrepancies between predicted and observed gasoline prices in Vancouver? Markets for crude oil and gasoline are closely connected but do not follow each other precisely. Gasoline is a refined product, and thus bottlenecks at refineries and existing gasoline inventories are crucial factors determining the price at the pump. Local demand and supply factors can lead to local deviations that are different from those in other regions of the country. Seasonal factors may also come into play. During September, after the end of the driving season, refining capacity is often taken offline for repair and maintenance (so-called "turnarounds"). Inventory levels can also be different regionally. In Western Canada, refineries tend to have a much lower level of crude oil inventories (about 5-7 days) than refineries in Eastern Canada (about 15-20 days). Similarly, inventory levels of refined gasoline differ. In anticipation of planned maintenance shutdowns, refineries build up inventory. Larger inventories put further downward pressure on crude oil prices. The bottom line: reduced refining capacity is currently responsible for unusually high gasoline prices, combined with strong demand from motorists.... Rest assured, though, that eventually prices at the pump will fall into line with crude prices again.