Chris Johns: Forecasters gloomy, but oil price plunge benefits Ireland
Impact of oil price collapse has potential to be massive
An oilfield in Iraq. The oil market is analysed more than any other, and for good reason – it really is that important. Photograph: Reuters
An oil price fall of 40 per cent constitutes an economic shock of major proportions. It will, if sustained, have profound implications for just about everybody.
If the UK economy had fallen into recession, Russia defaulted on its debts or the ECB finally begun to indulge in quantitative easing, we would expect fevered headlines and much speculation about what might happen next. But the impact of the oil price collapse we are currently living through has the potential to exceed all of these other, somewhat hypothetical, shocks.
At least one analyst has asked why global growth forecasts have continued to fall as the price of oil comes down. Gavyn Davies, the former chief economist of Goldman Sachs, has suggested that, under normal circumstances, growth expectations should be going up.
Indeed, according to some models, what we have seen could be consistent with up to a full one percentage point boost to global growth. Given the scarcity of growth right now, that’s massive. And for small, very open economies highly leveraged to global growth, that is particularly big news. But the forecasting community remains gloomy.
Of course, one reason why some commentators remain pessimistic can be found in one of the assumed causes of the oil price fall: low oil demand as a result of a stagnant Europe, slowing China and moribund Japan. Another relates to supply: US shale oil production has combined with increases in output in Iraq and Libya to boost overall pumping rates.
The oil market is analysed more than any other, and for good reason – it really is that important. We know more about the supply and demand for oil than for any other commodity. Yet we are rarely able to guess the price that will equilibrate supply and demand; indeed, we can be often surprised with sudden gyrations in the face of not much actual news.
So what’s going on? The truth is, nobody really knows: all of those explanations are ex-post rationalisations. We will probably find one day that the collapsing price of solar power also played a part.
For Ireland, lower oil prices will boost growth. If budget time forecasts for growth were reasonable, they should now be revised up. In fact, it is possible to construct a very optimistic scenario for 2015: too many commentators have been caught up in the now ultra-fashionable, ultra-pessimistic euro zone consensus. Europe is an economy that oscillates around a low trend growth rate. Only in extremis does it boom or bust, and neither is likely for as far as the eye can see.
Europe’s risks are political, not economic: low growth rates are clearly troublesome for the French but don’t bother Germany. With Europe, what you see is what you get: low growth. It is not good news for us but, equally, it is nothing new.
Lower oil prices should make (nearly) everyone feel more optimistic. An opportunist finance minister might even spy a chance to boost tax revenues in a relatively painless way. The UK chancellor could this week raise oil taxes, connected as they sometimes are to varying revenues from North Sea oil production.
We don’t have this link, of course. Nevertheless, a revenue-hungry Department of Finance could decide to share in some of the windfall, taking a bit back from the consumer. This could be administratively tricky but, with decent IT systems, not impossible, and a lot less controversial than water taxes, we might assume.
And it could enhance the coalition’s environmental credentials. It could be set up to raise taxes if oil prices stay down and to lower them if prices shoot up again.
There is a lot of good news in lower oil prices for Irish consumers and Irish businesses: in one key respect at least, Santa has come early.