Five main points from an article in The Economist about the low oil prices, plus one additional note on the Nepalese economy.
Over the past 18 months oil price has decreased by about 75%, from $110 a barrel to below around $25.
1. Oil importers are gaining and exporters losing as reflected in their trade balance and fiscal numbers. India has used this occasion to boost revenue by increasing excise duty on fuel without altering much the retail price. Meanwhile, Gulf countries are cutting down subsidies and other countries like Russia are slashing public spending to maintain fiscal prudence to some extent. Venezuela has already declared an economic state of emergency (partly got to do with the political and economic mismanagement).
2. All oil producers are maintaining or increasing their output share in the market. Despite OPEC being a cartel it is unable to dictate prices. Some of its members are pumping out oil below average cost (at times even below marginal cost). Iran is entering the market (with potential output of about 3 million to 4 million barrels a day). The shale gas boom has boosted oil output in the US from 5mb/d in 2008 to over 9mb/d in 2015. Oil glut is here to stay according to latest estimates.
3. OPEC members such as Saudi Arabia (top producer) want to continue pumping oil to suppress prices with hopes of driving shale producers in the US out of the market. However, innovations and efficient production lines have lowered marginal cost of shale gas producers to about $15 a barrel.
4. Overall commodities prices are falling and investment is also declining or put on hold. The slowdown of Chinese economy (about 6.9% growth in 2015 after almost a quarter of a century) is further depressing global demand and investment. Corporate debt is increasing, especially those of state-owned and private companies operating along the oil supply chain.
5. With low commodity prices, stock market volatility edging on the upper side, and lower private investment, the major worry for advanced economies struggling to accelerate growth is lower sticky general prices, i.e. prices are struggling to go higher and hence inflation remains subdued. It means economic growth is also low. Interest rate rise in the US (first time after 2008) will potentially slow down the initial momentum in heating up prices and will make USD stronger. It means currencies of other countries will depreciate somewhat relative to the dollar. Global growth forecast for 2015 is not that great, although the US and India stand out as exceptions.
6. Meanwhile, in Nepal, the supplies blockade at Birgunj/Raxual (the most important custom point) and other places continues. An acute fuel and supplies shortage is ruining the economy. Mismanagement by state-owned companies, mainly NEA and NOC, is further adding woes to the already depressed situation. At present, the Nepalese economy is beyond the point where you would typically categorize as being in an emergency-- it is in a desperate situation and requires drastic measures to recover fast. Production and supplies networks are either dislocated or destroyed, and household and business incentives are transformed in a way that won't serve the economy well. Black-marketing and carteling are prevalent. Remittances (amounting to about 28% of GDP) are sustaining the economy despite all other numbers going south. Public expenditure performance remains horribly diminished (in the first half of FY2016 capital spending is about 6% of planned expenditure in FY2016-- politicians and bureaucrats can blame the earthquake and blockade, but how much have they done on their part honestly to accelerate public spending in infrastructure?), and inflation is edging even higher (will remain above 10% as supply-side constraints continue to exert pressures on prices of goods and services, and inflationary expectations edge up higher every month). Amidst all of these sits a coalition government (with a jumbo cabinet) that is failing to realize and accept the magnitude and severity of the problem. Painful, deep institutional and governance reforms are required now. This primarily includes strengthening institutions by overhauling them (including labor reforms)-- reforming NEA (with its present governance structure, it is the biggest hurdle after lobbyists & politicians, to Nepal's energy future), NOC, NA, establishing PPP office, passing a plethora of reforms without putting many hooks (the parliamentarians are unnecessarily doing this at the committees these days-- and without much study on its ramifications later on), procurement reforms, public service delivery, etc. These are very tough reforms and political parties have a lot to lose given the links between employee unions, corporate houses, lobbyists, intellectuals and politicians. Cosmetic reforms ain't gonna cut it now.
