The benefits of low oil prices

Nov 21, 2001 01:00 AM

Although the US economy is almost certainly in a recession, investor sentiment has been surprisingly bullish. US equity markets have been on a sustained rise for the last month, and while most economic data remain weak, the occasional bright spot -- like October's strong retail sales report -- has buoyed investors. But the most encouraging news of all has been the fall in the price of oil, the by-product of weak global demand and a feud between OPEC and non-OPEC members over production cutbacks.
Indeed, the Economist Intelligence Unit has slashed its forecast for the average price of Brent Blend crude in 2002 from $ 21.51/barrel to $ 18.26/bbl. If our forecast is correct, the savings will provide a considerable stimulus to the US economy, reinforcing our view that a recovery should be underway by mid-2002.

The US is by far the world's largest consumer of oil: In 2000, the US accounted for 25.4 % of world consumption, a full percentage higher than in 1991. (The US consumed 18.7 mm bpd in 2000, or around 6.84 bn barrels for the year.) At an average price of $ 28.48/bbl in 2000, US businesses and consumers spent $ 194.84 bn on oil.
In 2001, we estimate that US oil consumption will decline by around 0.5 % year on year, to 6.81 bn barrels, but we expect growth of about 0.4 % in 2002, which will push total consumption back to 2000 levels. (US oil consumption grew by an average of around 1.4 % a year between 1991 and 2000).
If our consumption and price forecasts are correct, the US oil bill in 2002 will amount to $ 124.92 bn, almost $ 70 bn less than in 2000. If the average price were to slip further, say to $ 16/bbl, the oil bill would drop to $ 109.5 bn, $ 85 bn below the 2000 level. This is not much less than the $ 100 bn fiscal stimulus approved by the US House of Representatives in late October (a final version of the legislation is being held up in the Senate).

The oil price decline, then, could come close to doubling the stimulus already planned. This is in addition to the $ 300 tax rebates delivered to most wage-earning Americans in August, an earlier anti-terrorism spending package approved by Congress, and the 10 interest rate reductions by the US Federal Reserve since January.
This enormous amount of stimulus should provide the foundation for an economic recovery in 2002, and while we expect real GDP growth to reach only about 1.2 % for the year, this surge in liquidity should set the stage for much stronger growth of around 3.6 % in 2003.

Source: The Economist Intelligence Unit Limited
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