What does the decline in oil prices mean for the world economy? The answer depends on why it has happened and how long it might last. But overall it should be helpful, albeit with caveats. Particularly important might be the impact on net oil-exporting countries. Among vulnerable producers are regimes that one would dearly like to see weakened, Vladimir Putin’s Russia foremost among them. But even here the silver lining has a cloud. As Kirill Rogov of Moscow’s Gaidar Institute has noted, lower oil prices might exacerbate Mr Putin’s revanchism.
Between late June and the beginning of this month, the price of crude oil fell by 38 per cent. This is a big decline. But a bigger one occurred between the spring of 1985 and the summer of 1986. The sharp fall in the early to mid-1980s – not coincidentally, the event that preceded the collapse of the Soviet Union – was caused by two developments: the reduction in the energy intensity of consumption and production triggered by the two “oil shocks” of the 1970s; and the emergence of significant production in non-Opec countries, such as Mexico and the UK (see chart).
The story this time is not so different, particularly on the supply side. According to the International Energy Agency’s latest World Energy Outlook , supply of non-Opec oil and natural gas liquids might rise from 50.5m barrels a day (mbd) in 2013 to 56.1mbd in 2020. This would raise the share of non-Opec producers in global production from 58 per cent to 60 per cent. As much as 64 per cent of this increase is forecast to come from North America. Behind the rise in North American production is unconventional oil – so-called “tight oil” – in the US and oil sands in Canada. Meanwhile, Opec production is forecast to remain roughly constant.