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Falling oil prices helps China grow without inflation
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In the past few months, the plunge of oil prices has escalated. The trend is likely to prevail through much of 2015.
In summer 2008, the oil price hovered close to US$150 per barrel and Goldman Sachs predicted it would exceed US$200 by year-end. But then the global economic crisis caused the crude Brent price to plunge to US$45.
After stimulus packages and recovery policies, the price climbed to nearly US$130 in early 2011. It fell to US$110 in 2013, and in 2014, it plunged again; to less than US$50 recently.
As crude prices fell to their lowest level in five years in early December, investors concluded that the world economy was about to face another challenging year and the Dow Jones Industrial (DJIA) suffered a 316-point loss to 17,281.
Having lost their oil markets in the US and Europe, Nigeria and Colombia have been pushing their oil shipments to China.
In response, Saudi Arabia cut its official crude price in Asia by US$1 per barrel, and Iran and Kuwait followed. The energy producers’ rivalry for market share is fierce.
Some believe that the energy slowdown is really a showdown between Washington and Riyadh. Yet, the underlying drivers of price declines are complicated and involve much more than the energy revolution in the US or Washington’s recent permission for oil exports.
The Asian factor
The falling prices are partially driven by the gradual decline of demand in China, which is rebalancing from its most energy-intensive stage toward greater productivity and efficiency.
Meanwhile, several Asian currencies have been softening against the rising US dollar. The price plunge has also been fueled by rising costs of gas in several Asian economies that have been phasing out fuel subsidies, thus lowering demand.
In the tumultuous Middle East, scenarios of production cuts have not materialized.
The current consensus is that oil prices will find a floor in the first half of 2015. Prices were initially expected to stabilize in the second half at about US$80. But if Saudi Arabia continues to avoid cutting output, prices were expected to stay in the sub-US$70 per barrel territory (or, in the light of recent price declines, at the sub-US$60 per barrel) for longer than anticipated.
Falling oil prices translate to a buyers’ market. Along with other major importers, China is benefiting from the new status quo, which supports higher growth and lower inflation and thus lends support to the reform drive.
Dr. Dan Steinbock serves as research director of international business at the India China and America Institute (USA) and is a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see www.differencegroup.net. Shanghai Daily condensed the article.
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