Pain for Russia, gain for the West - the price of low oil


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Vladimir Putin warned yesterday it could take Russia two years to emerge from its current economic crisis. What does that imply for Russia? And what knock-on effects could this have on the rest of the world?


Given Russia’s currency crisis has been driven, to a large degree, by the fall in the global oil price, two more years of Russian economic pain implies the oil price is not going to bounce back.

The Russian central bank warned earlier this month that if the global oil price stays at $60 a barrel until 2017, GDP growth will collapse next year, with output falling by 4.5 per cent and by a further 0.9 per cent in 2016. That would mean Russia suffering its deepest recession since 2009.

While low oil prices are toxic for the energy export-dominated Russian economy, they are a boon for Western consumers. Low global oil prices have already helped to deliver the lowest annual inflation in the UK in 12 years at 1 per cent. It has also pushed down price rises in the US to 1.3 per cent.

This fall in the cost of living has a similar effect to a tax cut, boosting the effective spending power of households. And with advanced economies dominated by consumer spending, it’s a boost that should have a beneficial impact on overall GDP growth.


Christine Lagarde, the director general of the International Monetary Fund, said earlier this month that a 30 per cent fall in the global oil price translates into roughly an extra 0.8 per cent of GDP growth for oil-importing advanced countries, including Britain.

At the time of the IMF’s last round of forecasts in October, average global prices were expected to be $100 a barrel next year. And for the advanced country group as a whole, GDP growth was forecast to be 2.3 per cent in 2015.

Assuming oil prices average $70 next year, that implies an upgrade of the IMF’s growth assumptions for wealthy nations to 3.1 per cent.

Yet it’s not all good news. Falling oil prices are helping to push the eurozone towards deflation. Annual consumer price inflation fell to just 0.3 per cent in November, well below the European Central Bank’s target of just below 2 per cent.

If prices actually decline in the eurozone, it could have a negative impact on growth by making it more difficult for households and firms to service their debts and households could be put off buying goods in the expectation of lower prices in future.

Falling energy prices also make it uneconomical for oil firms to invest in the UK’s North Sea oil reserves. Robin Allan, chair of the independent explorers’ association Brindex, said yesterday that the industry was “close to collapse” because of the low international oil price.

Without further investment, British North Sea oil output, which peaked in 1999, is likely to fall further. This will deplete tax revenues, making it more difficult for the next Chancellor to reduce the country’s budget deficit.