SPOTLIGHT

Impact of Falling Oil Prices on the IMF Membership

The unexpectedly steep drop in oil prices over the past year—falling by more than one-half from September 2014 to January 2015—has had a significant impact across the IMF membership. The decline, which is part of a broader trend of declining commodities prices, has provided a boost to global growth and benefited many oil importers, but it also has weighed on economic activity among oil-exporting nations.

Impact of Falling Oil Prices on the IMF Membership
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The falling prices were driven by production increases (in members of the Organization of Petroleum Exporting Countries [OPEC] and non-OPEC countries) and a significant slowdown in the growth of global oil demand—particularly from Europe and the Asia-Pacific region.

The depth of the price decline took forecasters and markets by surprise: the October 2014 World Economic Outlook (WEO) showed the average price of oil at $99.36 a barrel in 2015 based on the assumed price on futures markets, while the April 2015 WEO showed the assumed price for 2015 at $58.14 and $65.65 in 2016. The WEO contained a detailed analysis of commodity market developments and forecasts, with a focus on investment in an era of low oil prices.

Broad implications for the IMF’s work

The impact of oil prices across the IMF’s membership had broad implications for the work of the IMF. Bilateral and multilateral surveillance activities all adjusted to the rapidly changing environment. Article IV consultations, Regional Economic Outlooks, and the IMF’s flagship publications—the WEO, Global Financial Stability Report (GFSR), and Fiscal Monitor—all devoted considerable attention to issues related to oil prices.

While the IMF assessed the overall macroeconomic impact as positive, other reports highlighted the risks. The April 2015 GFSR, for example, stated that “the speed and magnitude of the movement in oil prices raise questions about how stress can be transmitted through the financial sector.” It cited channels through which lower prices could "spawn financial vulnerabilities," including "a self-reinforcing cycle of rising credit risk and deteriorating refinancing conditions for countries and companies, a decline in oil surplus recycling in world funding markets, an strains on the financial market infrastructure’s ability to accommodate prolonged heightened energy price volatility."

Fiscal implications of falling oil prices

The fall in international oil prices also has significant implications for oil importers and exporters in terms of public finances. The April 2015 Fiscal Monitor highlighted this element of the impact of oil prices, saying that importers were likely to benefit while exporters could be hurt. The Fiscal Monitor said: “The impact could be large, but whereas the gains will be spread across many economies, the adverse fiscal effects will be concentrated in relatively few. Although oil exporters account for a lower share of global GDP than oil importers, exporters face a much larger shock given that oil has a much bigger weight in their econo-mies and budgets.”

For many exporters, the Fiscal Monitor said, vulnerabilities were building before prices began falling; revenues from higher prices paid for large increases in current and capital expenditures. As a result, the fiscal break-even price for oil increased in most exporting countries in the Middle East, and most exporters need prices considerably above the $58 projected for 2015 to cover budgetary spending.

A major element of the fiscal impact of falling oil prices lies in the area of fuel subsidies and the structure of energy taxation. The Monitor concluded that the higher the “pass-through” of fuel prices to consumers, the lower the fiscal savings would be. For example, oil importers that provide no subsidies but earn revenues from oil tariffs and other taxes could see revenue deterioration. On the other hand, if the entire decline in oil prices is passed on to consumers, there could be stronger aggregate demand and revenues.

IMF area departments—through Article IV consultations and regional surveillance activities—identified a window of opportunity for both importing and exporting countries to reform fuel subsidies and taxation regimes that would strengthen fiscal balances to create space for increasing priority expenditures. Public finances in many oil-importing low-income developing countries are expected to improve as declining oil prices reduce energy subsidies.

Country-by-country trends

The IMF Executive Board has been deeply involved in reviewing the reports and documents that analyze the impact of falling oil prices. Beyond detailed discussion of the analysis contained in the flagship publications, it also has reviewed the trends on a country-by-country basis. For example, an analysis of the Executive Board’s press releases on Article IV consultations during the period January 1—March 31, 2015, showed that 58 percent of the 21 Article IV Board’s assessments contained references to the impact of lower oil prices—with a more detailed focus on the implications for oil producing countries.

IMF Economic Counselor Olivier Blanchard and Rabah Arezki, head of the commodities team in the Research Department, posted an article on the oil price decline on iMFdirect, the IMF’s blog. The article, titled "Seven Questions about the Recent Oil Price Slump," examined the mechanics of the oil market, the implications for various groups and for financial stability, and steps policymakers could take to address the impact on their economies. It attracted the largest readership of any item posted on the blog during the year.