From a price range between 100 and 120 USD (U.S. dollars) per barrel in 2011–2014, the crude oil price fell from mid-2014 onwards, reaching a level of 26 USD per barrel in January 2016. Here we assess the economic consequences of this strong decrease in the oil price. A retrospective analysis based on data of the past 25 years sheds light on the vulnerability of oil-producing regions to the oil price volatility. Gross domestic product (GDP) and government revenues in many Gulf countries exhibit a strong dependence on oil, while more diversified economies improve resilience to oil price shocks.
Toon Vandyck, Alban Kitous, Bert Saveyn, Kimon Keramidas, Luis Rey Los Santos and Krzysztof Wojtowicz
European Commission, Joint Research Centre, 41092 Seville, Spain
Received: 7 March 2018 / Accepted: 28 March 2018
The lack of a sovereign wealth fund, in combination with limited oil reserves, makes parts of Sub-Saharan Africa particularly vulnerable to sustained periods of low oil prices. Next, we estimate the macroeconomic impacts of a 60% oil price drop for all regions in the world. A numerical simulation yields a global GDP increase of roughly 1% and illustrates how the regional impact on GDP relates to oil export dependence. Finally, we reflect on the broader implications (such as migration flows) of macroeconomic responses to oil prices and look ahead to the challenge of structural change in a world committed to limiting global warming.
Introduction: Making Sense of the Recent Evolution of the Crude Oil Price
Commodity prices are subject to booms and busts. In the case of crude oil, this is illustrated by the steep decrease in prices between July 2014 and January 2016 (Figure 1). From a price range between 100 and 120 USD (U.S. dollars) per barrel in 2011–2014, Brent crude prices dropped steeply to 26 USD/barrel (bl), the lowest price level observed in nearly 15 years. This price volatility, as well as sustained periods of low oil prices, can bring substantial challenges to those countries that strongly depend on fossil fuel production for jobs and economic growth. The objective of this study is to shed light on the vulnerability of oil-exporting regions with respect to crude oil prices.
After a broad discussion of the underlying drivers of the international oil market evolution, the following section presents a backward-looking descriptive analysis into the regional economic dependence on oil production and prices. Next, we assess the macroeconomic impact of a 60% decrease of crude oil prices. The final section provides a policy discussion and suggestions for future work.
Figure 1. Daily Brent crude oil price (current U.S. dollars, $) and monthly global production (1000 billion barrels per day, bbl/d). Data source: EIA . Latest price data point: 26 February 2018.
When seen in a long-run context, the oil price coming down from high levels in 2011–2013 may not be a surprise to those claiming the end of a commodity supercycle . Nevertheless, various underlying drivers have been suggested to explain the sharp price decline [3,4,5,6,7]. Common across most studies is the finding that the oil price drop resulted from several factors occurring simultaneously.
First, unanticipated changes in crude oil production can generally explain an important part of oil price fluctuations in the short term. The rise of tight oil, often labelled shale oil, in the United States could have put downward pressure on the international oil price. The production of oil from unconventional sources has led to a strong increase in U.S. oil output from 2011 onwards. Consequently, the U.S. oil production volumes became the largest in the world, exceeding those of Russia and Saudi Arabia.
Perhaps in response, the Organization of Petroleum Exporting Countries decided in late 2014 not to reduce production levels despite the low prices. Saudi Arabia’s shift from the role of “swing producer” to a strategy focused on market share can have important implications on price stability, and has likely contributed substantially to the observed oil price drop. Although analysts expected that unconventional oil production in the U.S. would fall swiftly when oil prices dropped below breakeven points, in the reality the response was more sluggish and less elastic, further contributing to the oversupply of the market . Furthermore, production levels in Iraq and Libya were higher than expected.
A second factor that can contribute to a drop in oil prices is a decline in (expected) oil consumption. A period of more than 10 years of double-digit annual GDP growth rates came to an end in 2014 in China, which has become the second largest consumer of oil in the world after the U.S. With the GDP in 2016 only 1.2% higher than the previous year, anticipations for long-run growth may have been revised, with corresponding consequences for oil demand expectations in Asia putting downward pressure on the price.
Furthermore, energy and climate policies in regions such as Europe are favoring a more efficient use of (low-carbon) energy, lowering future oil consumption. From February 2015 onwards, countries submitted climate pledges labelled Intended Nationally Determined Contributions to the United Nations Framework Convention on Climate Change, eventually leading to the Paris Agreement in December 2015. This landmark agreement sends a signal of global willingness to address the challenge of climate change, and move onto a pathway of sustainable growth in which the share of fossil fuels in total primary energy consumption plays a smaller role than is the case today.
Another factor affecting oil demand is technological change, particularly in the transportation sector. Although liquid biofuel covered only around 2% of world liquid fuel consumption  and the electric vehicle penetration rate in total sales was limited to 0.5% in 2015 [10,11], the cost decrease of batteries observed in recent years may shift the expectations of the electrification of the vehicle fleet in the medium to long term. Third, the relative dynamics of supply and demand resulted in remarkably positive stock changes in 2014–2015 (nearly 1 million barrels per day (Mbl/d) in 2014 and 2 Mbl/d in 2015 ), sending a strong signal of an abundantly supplied oil market and perhaps marking the end of a supercycle, in which demand cannot sufficiently adjust to a rapidly rising demand.
Fourth, changes in the U.S. dollar exchange rate may lead to oil price fluctuations, as the U.S. dollar is the main currency for the global oil trade. The appreciation of the U.S. dollar makes crude oil more expensive for the rest of the world, reducing oil demand and leading to lower oil prices expressed in U.S. dollars.
Can we derive useful insights for the future evolution of the oil price? The price levels observed in 2015–2017 may be insufficient to sustain production levels for some sources (Figure 2). This in turn can reduce the oversupply, tighten the market, and raise prices, although the adjustment time lag is uncertain. Low oil price levels affect regions and sources with high extraction and production costs at the margin. In Europe, the North Sea may be an area that is affected by low oil prices, with the break-even price for many fields around 60 USD. In North America, relatively high-cost unconventional oil projects may become unprofitable at low oil price levels.
Most oil exporters from the Middle-East and Africa have marginal production costs lower than the current oil price (Figure 2), which implies that their production level should only be marginally affected if the price is not decreasing further. On the oil demand side, a low price level could limit the incentives for investing in energy efficiency improvements as well as for developing alternatives to oil. The estimated share of electricity in total energy consumption in the transport sector ranges from 1% by 2035  to 6–10% in 2050 , depending on climate policies. The five-yearly pledge-and-review cycles included in the Paris Agreement will provide an indication as to where global climate change mitigation ambitions are headed.
Figure 2. Marginal production costs (2014) vs. Brent price in $ (U.S. dollars, USD). Data source: [1,18]. Abbreviations: Russia (RUS), Canada (CAN), Brazil (BRA), Angola (AGO), Nigeria (NGA) and United Arab Emirates (UAE).
Decisions of large countries such as India to ratchet up climate action, or to step out of the agreement such as the U.S., can have an impact on oil demand expectations and price levels. An alternative way to look ahead to the short-run evolution of the oil price is to evaluate the futures market, although they do not necessarily provide a good long-term forecast . An outlook  estimated that Brent crude oil would average 34 U.S. dollar per barrel (USD/bl) in 2016 and 40 USD/bl in 2017, slightly below the price in the futures market, while actual prices were around 44 USD/bl and 54 USD/bl in 2016 and 2017, respectively.
A different study  states that oil prices are likely to remain low over the medium term, and could range between 60 USD/bl and 70 USD/bl in the long term. Projections show [16,17] that Brent crude oil would range between 100 USD/bl and 150 USD/bl in 2030 (expressed in the value of the USD in 2014), and highlight the role of international climate policies on the oil price.
Retrospective Analysis of the Exposure to the Global Oil Market
This part of the paper starts off with a set of descriptive statistics that highlights the weight of oil-producing countries in the export market and their political stability, human development, and economic structure. Furthermore, Section 2.1 discusses the availability and size of a sovereign wealth fund that may serve to absorb oil price shocks. Combined, these statistics provide a first indication of a broad-based resilience to cope with short-run oil market disruptions. The next step in the analysis is a backward-looking assessment of macroeconomic exposure to oil price fluctuations. The estimations presented in Section 2.2 reveal the sensitivity of GDP and government revenues to the oil price over the period of 1990–2014.
Exploring the Vulnerability of Oil Exporters to Low Oil Prices
The internationally traded crude oil (in 2014) is supplied by the countries listed in Table 1. Combined, the crude oil production volumes of these countries covered roughly 70% of the world output in 2014 , of which of which more than one-third is supplied by only two countries: Saudi Arabia (19% of exports) and Russia (17%).
Table 1. Descriptive statistics for oil-exporting countries (2014). Data source: Oil production and consumption [19,20]; population . Abbreviations: Commonwealth of Independent States (CIS).
The geographic location and the regional aggregation (color scheme used throughout the paper) is shown in Figure 3. The remainder of this paper focuses on a subset of oil-exporting countries that excludes Turkmenistan, Brunei, Colombia, Ecuador, and Trinidad & Tobago.
Figure 3. Map of oil exporting countries (2014).
Figure 4 displays the political stability index  of oil exporters as a function of their human development index (HDI, ). The political stability index aims to measure the perceptions of political stability in a country, including the likelihood of politically motivated violence, while the human development index captures aspects such as health, education, and living standards.
Figure 4. Political stability and human development index (HDI) for oil exporting countries (2014). Data source: political stability indicator , HDI . Size of the bubble indicates population size in 2014 .
Most Sub-Saharan African producers score relatively low on political stability, with the exception of Gabon (GAB), a small producer with a small population. Nigeria (NGA), in particular, appears as a large (highest and fast-growing population, with close to 180 million inhabitants in 2014) and a socioeconomically fragile country. In addition, some important North African and Middle Eastern exporters also display a low political stability: Algeria (DZA) and Iran (IRN) in addition to Iraq (IRQ) and Libya (LBY), which is currently undergoing violent conflicts.
Other important exporters, such as Saudi Arabia (SAU) and the other Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) are perceived to have a higher stability. Norway (NOR) and Canada (CAN) appear rather stable, while other non-OECD exporters present a contrasted situation, with Mexico (MEX), Russia (RUS), and other CIS (Commonwealth of Independent States: the former Soviet Republic except the Baltic States) countries scoring in-between Iran and Saudi Arabia.
For a more comprehensive analysis on the capacity of states to cope with a low oil price, Table 2 complements the abovementioned statistics with numbers on oil-related sovereign wealth funds (SWF) that may be used as a buffer capacity with a quicker response time than putting oil reserves into production. Interestingly, all Middle Eastern exporters have a SWF: while Iraq’s SWF is small and Oman and Iran have limited funds with respect to GDP (still 100% of government revenues in the case of Iran), other exporters have important funds ranging from 85% of GDP (Saudi Arabia; twice the size of the government revenues) to more than 300% of GDP (Kuwait and the United Arab Emirates).
Table 2. Oil-related sovereign wealth funds (SWFs) (2014). Data sources: Oil-related SWFs , population , GDP , government revenue . SWFs taken into account: ARE (ADIA, ICD, ADIC, IPIC, MDC, EIA, RIA); SAU (SAMA, PIF); KWT (KIA); QAT (QIA); IRN (NDF); OMN (OIF); IRQ (DFI); LBY (LIA); DZA (RRF); AGO (FSDEA); NGA (BDIC, NSIA); RUS (RNWF, RRF, RDIF); KAZ (S-K JSC, KNF, NIC); AZE (SOFAZ); CAN (AHSTF); MEX (ORSFM, FMP); VEN (FEM); NOR (GPF).
Saudi Arabia announced in April 2016 its intention to expand its second largest sovereign wealth fund, the Public Investment Fund (PIF), to nearly 2 trillion USD by 2030, which would add up to a total of 2.5 trillion USD if the other funds remain at the same level as of today. Furthermore, North African oil exporters have more substantial funds, with Algeria at 23% of total GDP (70% of government revenues) and Libya at 160% of GDP. Importantly, Sub-Saharan African oil exporters have not established a SWF (Congo, Gabon, Sudan, and Chad) or only up to limited amounts (Nigeria and Angola). The lack of a SWF as an adjustment mechanism renders these countries more vulnerable to short term oil price shocks.
To further identify the oil-exporting countries that are most vulnerable to economic and social upheaval due to a long period of low oil prices, the following figures highlight the role of oil in the economy and as a source of government revenue. Figure 5 and Figure 6 show the relation between oil reserves per capita and oil exports, the latter expressed in value relative to GDP (Figure 5) or government revenue (Figure 6) in the year 2014.
Oil exports are calculated as the product of oil exports in volume (production minus consumption) by the oil price (Brent, in current USD) and divided by GDP or government revenue (in current USD at Market Exchange Rate, MER). Expressing oil exports relative to GDP indicates the overall economy-wide importance, while comparing against government revenue serves as a proxy to evaluate the potential importance of the oil sector for the state budget, even though it does not show explicitly the direct government revenue from the oil sector. Norway (NOR) is shown as a reference point because it has the highest income per capita, the highest human development index, and with Canada, the highest political stability of all oil exporters, as shown in Figure 4.
Figure 5. Exposure of economy: oil exports vs. GDP (2014). Note: The blue dotted lines are centered on Norway (NOR). Data: [19,21,25]. Kuwait (KWT) is not shown because it has very high reserves per capita (27,000 bl, oil exports ~60% GDP).
Four groups of countries can be identified based on Figure 5 and Figure 6 (relative to Norway (NOR)):
- Upper left: high exposure of the economy and government revenue and limited reserves per capita. This is especially true for Congo (COG), Angola (AGO), Gabon (GAB), and Azerbaijan (AZE), and to a lesser extent for Russia (RUS) and Algeria (DZA). In Nigeria (NGA), the most populated of all exporters, oil exports are larger than the government revenues, indicating that resources for the government are potentially much more exposed to the oil market than when looking only at GDP. When looking at oil exports relative to government revenue, a regional pattern emerges with many Sub-Saharan African countries located in the top left part of Figure 6, suggesting particular vulnerability to oil prices in the region.
Figure 6. Exposure of state: oil exports vs. state budget (2014). Note: The dotted lines are centered on Norway (NOR). Data: [19,21,25,26]. Kuwait (KWT) is not shown because it has very high reserves per capita (27,000 bl, oil exports ~70% government revenue).