Cheap oil and global growth
Falling oil prices are rooted in Middle East geopolitics, not wilting Chinese demand, and one can fully expect global growth to get a boost from cheap oil.
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VIOLENT swings in oil prices are destabilising economies and financial markets worldwide. When the oil price halved last year from US$110 to US$55 a barrel, the cause was obvious: Saudi Arabia's decision to increase its share of the global oil market by expanding production. But what accounts for the further plunge in oil prices in the last few weeks - to lows last seen in the immediate aftermath of the 2008 global financial crisis - and how will it affect the world economy?
The standard explanation is weak Chinese demand, with the oil-price collapse widely regarded as a portent of recession, either in China or for the entire global economy. But this is almost certainly wrong, even though it seems to be confirmed by the tight correlation between oil and equity markets, which have fallen to their lowest levels since 2009, not only in China, but also in Europe and most emerging economies.
The predictive significance of oil prices is indeed impressive, but only as a contrary indicator: Falling oil prices have never correctly predicted an economic downturn. On all recent occasions when the price of oil was halved - 1982-1983, 1985-1986, 1992-1993, 1997-1998 and 2001-2002 - faster global growth followed.
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