In the emerging markets the impact of the oil price collapse varies widely. Net oil importers benefit from sharply lower import bills while central banks gain room for expansionary policies. India, Indonesia and other countries have used low oil prices to slash energy subsidies. The money saved can be channeled into investment programs. Most oil-exporting nations in the Arab world have accumulated considerable foreign assets in recent years, enabling them to cushion the impact of plummeting oil revenue. The picture is different in Venezuela, where default looms, and Russia, where the double whammy of oil revenue losses and sanctions will tip the economy into a deep recession.
Oil prices have collapsed before. But this time prices have fallen in an environment of extremely low inflation and interest rates. The oil price collapse has pushed inflation down towards zero or even into negative territory in many places. Central banks regard this as a dangerous undershooting of their inflation targets and will continue to counter the effect through unconventional measures such as quantitative easing. While this will give a further stimulus to some economies, it also fuels asset bubbles and therefore creates new financial risks.
Given how important oil prices are for purchasing power, investment and monetary policy, their future development is a key variable in our economic outlook. Predicting commodity prices has always been an art rather than a science. Hardly any forecasters had predicted the rapid slide in prices since mid-2014. The shale oil boom has turned the US into a second global swing producer, alongside Saudi Arabia. This new interplay between OPEC strategy and market dynamics in the western hemisphere makes forecasting oil prices even more difficult. Heightened political risk in oil producing countries such as Russia, Iraq, Libya, Nigeria or Venezuela could introduce further volatility.
With these caveats in mind, we expect oil prices to remain at their present level or even somewhat lower for another one or two months as supply is still sufficient and stocks are high. In the course of the year, maybe beginning in the second quarter, oil prices will start to edge up again gradually as production cuts in North America and elsewhere become felt and OPEC producers, we assume, begin to tighten supply. But with Brent prices at USD 60 a barrel on average in 2015, oil will still be some 40% cheaper than a year earlier. In 2016 oil prices are likely to average around USD 70 a barrel. Due to shale oil production, the supply function has become more price-elastic. Oil prices are therefore unlikely to return to the levels seen in the first half of 2014 in the near future.