Is oil price plunge good or bad for global economy?

THE crude oil price has fallen to a four-year low. That should be a good thing, apparently, for the world as it is supposed to help catalyse economic growth. There are, however, strong arguments to make a case that it may not, and could in fact thwart the projected pace of economic growth in 2015.

To follow this argument, it is useful to understand the political economy of oil as a commodity, its price levels, and that cartel of oil-producing economies - the Organization of the Petroleum Exporting Countries (Opec).

First, it has been widely recognised that the decision of Opec countries, particularly its largest oil-producing member Saudi Arabia, to not cut production is strategic. Even though it could have boosted its profits by cutting production, and consequently raising prices, Opec opted for market share instead of price. Oil producers are concerned that high prices may result in them losing some market share to alternative energy source, notably shale from the United States.

According to Wood Mackenzie, the current level of WTI crude oil price at less than US$70 per barrel is unsustainable for US shale projects and it cautioned that if prices stay below US$70 per barrel, they could result in production cut of 150,000 barrels of shale per day. This has an impact on American fortunes for 2015 - both economically and strategically.

It so happens that 2015 was also supposed to mark the year that the US became the world's largest net exporter of energy, replacing, ironically, Saudi Arabia. The fracking of shale in the US was due to be a driving force behind this ascendance.

The squeezing of the US shale industry has an even more significant impact. Many economists have predicted that the global economy will improve next year on the back of renewed economic vigour in the US. Much of this rejuvenation of the US economy was also built on the shale boom - a greater and cheaper source of energy produced domestically that would lead to lower business costs and give the economy a boost. Thwarting shale in its tracks could adversely impact the US economy.

Secondly, the Opec decision can hardly be called a collective decision because many of its members need higher oil prices to sustain their respective economies. Keeping prices low could plunge several of them into crisis. Most of them would require a price of above US$80 per barrel to manage their budgets and some would need oil to be priced above US$100.

Russia needs oil to be priced at US$105 per barrel in order to balance its budget. Arguably, Russia may suffer a bigger blow from falling oil prices than from Western economic sanctions for its political involvement in the Ukrainian crisis. It is reported that Russia could lose US$100 billion a year if prices remain below US$80 per barrel. Iran, another sanctions-hit country, needs oil to be priced at US$130 per barrel. The list goes on to include Libya, Nigeria, Algeria and Venezuela. If all of these countries run into economic troubles, then the world may have to pay for low oil prices.

Even within Asia, many smaller players in oil-related industries may not be able to withstand the pressure of low oil prices and run into trouble, with many of them tapping into bond markets to raise financing. Their winding down could have ripple effects within these economies.

The silver lining is that lower oil prices could benefit large net importing countries such as India, Indonesia and even China to boost their economies. The question is: Will they be sufficient to help bolster the global economy?