WASHINGTON, D.C.: Oil prices are expected to remain soft over the next few years, with considerable volatility in global oil markets, said the latest research report released by the World Bank on Thursday.
The paper, entitled “The Great Plunge in Oil Prices: Causes, Consequences, and Policy Responses,” offered a comprehensive picture of the causes and economic and financial consequences of the oil price decline, the Washington-based institution said.
It attributed the recent oil prices plunge to several factors, including rapid expansion of oil supply from unconventional sources, a significant change in OPEC’s policy stance, and weak global demand. From June 2014 to February 2015, oil prices fell almost 50 percent.
These underlying forces are buoyed by a strong U.S. dollar and the fact that oil production in the Middle East has not been severely disrupted by ongoing conflict, said the bank.
“The impact of lower oil prices for the world economy should generally be positive over the medium term, though oil-exporting nations will be hit adversely, as the sharply lower oil prices have dampened investor sentiment on oil-exporting emerging market economies and could add volatility in financial markets,” said Kaushik Basu, chief economist and senior vice president of the World Bank.
It estimated that a supply-driven decline of 45 percent in oil prices could be associated with a 0.7-0.8 percent increase in global GDP over the medium term and a temporary decline in global inflation of around 1 percentage point in the short term.
In the case of China, the impact of lower oil prices is expected to boost economic activity modestly by 0.1-0.2 percent as oil accounts for only 18 percent of energy consumption. The country’s inflation could fall over several quarters due to the low oil prices.
For oil importers, the pass-through into slowing inflation may ease pressure on central banks and could provide room for policy accommodation, while central banks of oil exporters will have to balance the need to support growth against the need to contain inflation and currency pressures.
In regard to fiscal policy, the loss in oil revenues for exporters will strain public finances, while savings among oil importers could help rebuild fiscal space, said the bank.