Lower oil prices may strain financial markets: IMF report

However, the size of this boost is dictated by a number of factors, the report notes, including the underlying drivers of the price decline, the extent to which cheaper oil translates into cheaper fuel prices for households and firms, how much of the savings they spend, and any government policy responses to oil prices.

“Although oil price gains and losses across producers and consumers sum to zero, the net effect on global activity is positive,” the report states, because, “the increase in spending by oil importers is likely to exceed the decline in spending by exporters, and lower production costs will stimulate supply in other sectors for which oil is an input.”

Retail fuel prices have declined, on average, by only half as much as world oil prices, the report notes, adding that Europe has had the highest pass-through of lower prices to the retail level, while countries in the Middle East and sub-Saharan Africa have generally had the lowest impact. “After accounting for the limited pass-through to retail prices, the fall in oil prices should boost global growth by about [half a] percentage point in 2015–2016,” the report estimates.

Yet, other economic shocks are expected to offset this positive effect, the report notes, and, as a result, the IMF recently lowered its global growth forecast.

Moreover, “the speed and magnitude of the oil price decline has the potential to trigger financial strains, which could reduce the global benefits of lower oil prices,” the report warns. Those strains include oil companies with heavy debt loads, and bank exposure to the energy sector.

In addition, “the redistribution of wealth among investors with varying saving and portfolio preferences could have market repercussions, and those effects will also take time to play out,” the report adds.

Looking ahead, the oil price outlook is “highly uncertain,” the report states, but a substantial part of the recent decline is expected to persist into the medium term. Given the expectation that lower prices are here to stay, oil exporting countries will need to make fiscal adjustments to accommodate this new reality, the report notes.

“The monetary policy response will need to be tailored to the domestic cyclical position, inflation expectations, and any external pressures. Countries exposed to potential financial strains would benefit from strengthening their macroprudential policy frameworks,” the report states. “Lower oil prices also underscore the need for real and financial sector reforms to foster diversification of oil exporters’ economies.”

Lastly, the arrival of low oil prices also provides a window of opportunity to “undertake serious fuel pricing and taxation reform in both oil-importing and oil-exporting countries. The resulting stronger fiscal balances would create space for increasing priority expenditures and/or cutting distortionary taxes, thereby imparting a sustained boost to growth. In a number of low- and middle-income countries, energy sector reforms aimed at broadening access to reliable energy would have important development benefits,” the report concludes.