OPEC just gave the world its biggest QE

By deciding not to cut oil production, the Organisation of the Petroleum Exporting Countries (OPEC) has done more to global economy than repeated quantitative easing (QE) that central banks have been rolling out.

 

Oil futures were trading at a four-and-a-half year low on Friday after OPEC decided to maintain their production rate. NYMEX crude traded below $70 a barrel, its lowest level since May 2010 and Brent crude at $72 per barrel was at its lowest level since August 2010.

 

Falling crude prices is beneficial for most of the economies around the world apart from the ones that are producing them. International Energy Agency (IEA) has predicted a ‘new chapter’ in energy markets and warned that higher prices in the short term are unlikely. 

 

Mike Wittner, head of oil research at Societe Generale SA in New York has been quoted by Bloomberg as saying: “We are entering a new era for oil prices, where the market itself will manage supply, no longer Saudi Arabia and OPEC.”

 

If oil prices are going to be low, oil importing countries are biggest beneficiaries. Money starts moving out of energy assets and into bonds of oil importing countries. Standard Chartered has come out with a report on falling oil prices saying that sharp falls in oil prices appear to have triggered a reallocation trade (of bonds) towards oil importers.

 

But the beauty of lower oil prices is that it impacts the common man. Douglas R. Oberhelman, chief executive of Caterpillar, the multinational maker of heavy construction equipment, has been quoted here as saying: “If oil prices stay between $75 and $95 a barrel, we would see the kind of stimulus package that the Federal Reserve or Congress could never do.”

 

Repeated QEs have had little impact on economies that had initiated it. Federal Reserve of the US realising the limited impact QEs had on the economy finally decided to stop it. However, lower energy prices will have a more direct impact to section of economy where QEs could not penetrate.

 

Lower oil prices leave more money in the hand of the consumer. Those at the bottom or lower end of the pyramid are most affected by higher oil prices. Dean Maki, chief United States economist at Barclays has pointed out: “When oil prices fall, the benefit to consumers outweighs the loss to producers. Investment in oil and gas production is still less than 1% of gross domestic product. Consumer spending is 68.5% of GDP”

 

What do low oil prices mean for Indian economy? Apart from the obvious beneficiaries like refineries, auto companies and energy intensive sectors, it is the consumables sector which will gain from incremental savings. Thus even though considered as defensive stocks which run against the market, consumer goods stocks are touching all-time highs along with the market.