Date: 2025-05-19 Page is: DBtxt003.php txt00021293
Economy
Energy Economics
World Bank ... What triggered the oil price plunge of 2014-2016 and why it failed to deliver an economic impetus in eight charts
Original article: https://blogs.worldbank.org/developmenttalk/what-triggered-oil-price-plunge-2014-2016-and-why-it-failed-deliver-economic-impetus-eight-charts
Burgess COMMENTARY
The time series For Brent crude oil prices is very similar to the WTI time series with the same fluctuations in the period from 1993 to 2021, with the 2021 price substantially higher than the 1993 price.
What is missing from this time series is the price increase that took place in the 20 years from the early 1970s to 1993. Prior to 1973 the price of crude oil was aroung $3.50 a barrel. After the oil shock orchestrated by OPEC, the price of a barrel of crude oil increased to around $13.50 a barrel.
Later in the 1970s the price of crude oil surged to around $30.00 a barrel.
During the 1980s and the 1990s the crude oil price remained fairly steady at a little under the $30.00 level. There was a spike in the price in 1990 when Iraq invaded Kuwait and much of the world mobilized to push Iraq out of Kuwait in the First Gulf War during the administration of President Bush (41)
In the early 2000s, during the administration of President Bush (43), the price of crude oil increased from $29.59 in January 2001 (WTI) to a high of $125.40 in May 2008 with a subsequent rapid decline (crash) to $41.12 in December 2008
During the Obama administration there was a strong crude oil price recovery reaching $109.53 in May 2013. The price stayed around $100.00 a barrel until July 2014 after which there was a rapid decline in prices.
The 2014-16 collapse in oil prices from $103.59 in July 2014 to $47.22 in January 2015 was driven by a supply glut caused by the success of 'fracking' in the USA. The strong general economy in the USA during the later Obama years helped crude prices recover a bit reaching $51.97 in December 2016.
During the Trump administration, prices strengthened as the supply demand balance improved reaching around $70.00 a barrel ($70.98 in July 2018) This supply demand balance was massively disrupted by the Covid-19 pandemic and in April 2020 the price had dropped to just $16.55 a barrel.
In late 2021 there is now a lot of talk about inflation including energy cost inflation. The crude spot price (WTI) reached $81.48 in October 2021 ... high relative to the Obama and Trump years, but around the same price as July 2008 towards the end of the Bush (43) administration.
This World Bank blog adds some useful background to the reason for the price decline that took place in the 2014 to 2016 period. Simply put it was the adoption of hyadraulic fracturing ('fracking') to extract oil from rock formations. This added huge amounts of oil production pottential in the United States and substantially excess production capacity in the United States than is needed for domestic consumption ... in other words, the US becamse energy independent for the first time in a very long time, and the ability of OPEC to dominate international energy pricing rather less than it was since 1973.
For the big establiished companies in the energy industry this was not particularly good news. It is much more difficult to make big profits when there is an excess of supply. It took the big companies a while to get themselves organized to manage the price situation in the Unites States and in world markets. I should note that my view on this subject is not reflected in the World Bank essay. Otherwise the WB essay is very interesting.
Peter Burgess
MARC STOCKER JOHN BAFFES DANA VORISEK ... Published on Let's Talk Development
JANUARY 18, 2018
The 2014-16 collapse in oil prices was driven by a growing supply glut, but failed to deliver the boost to global growth that many had expected. In the event, the benefits of substantially lower oil prices were muted by the low responsiveness of economic activity in key oil-importing emerging markets, the effects on U.S. activity of a sharp contraction in energy investment and an abrupt slowdown in key oil exporters.
Biggest drop in oil prices in modern history
Between mid-2014 and early 2016, the global economy faced one of the largest oil price declines in modern history. The 70 percent price drop during that period was one of the three biggest declines since World War II, and the longest lasting since the supply-driven collapse of 1986.
Real oil prices
Real oil prices Source: World Bank.
Real oil prices Source: World Bank.
Notes: Real oil prices are calculated as the nominal price deflated by the international manufacturers unit value index, in which 100=2010. World Bank crude oil average. Last observation is November 2017.
Rising efficiency gains in U.S. shale oil
Booming U.S. shale oil production played a significant role in the oil price plunge from mid-2014 to early 2016. Efficiency gains in the sector lowered break-even prices considerably, making U.S. shale oil the de facto marginal cost producer on the international oil market.
Average wellhead break-even oil price
Source: Rystad Energy NASWellCube Premium.
Source: Rystad Energy NASWellCube Premium.
Notes: Does not include test activity, where well was shut-down after completion. Last observation is 2017Q2.
Supply glut reinforced by weakening demand prospects
The initial drop in oil prices from mid-2014 to early 2015 was primarily driven by supply factors, including booming U.S. oil production, receding geopolitical concerns, and shifting OPEC policies. However, deteriorating demand prospects played a role as well, particularly from mid-2015 to early 2016. This partly explains why the oil price plunge failed to provide a subsequent boost to global activity.
Oil price decomposition
Source: World Bank.
Source: World Bank.
Notes: Based on the decomposition of oil price changes from a structural vector autoregressive (SVAR) model including global industrial production, global oil production, oil and metals prices. The identification scheme is comparable to that suggested in Caldara, Cavallo, and Iacoviello (2016), putting restrictions on short-term oil supply and demand elasticities based on a survey of the literature. Last observation is October 2017.
Disappointing growth in oil importers
Rather than lifting global growth, the oil price plunge was accompanied by a slowdown in 2015 and 2016. A sharp deceleration in oil-exporting economies dragged global economic activity down, but disappointing growth in oil-importing economies, including the United States, China and non-oil commodity exporting emerging markets, explained most of the negative surprise around that period.
Contribution to global growth forecast errors
Source: World Bank.
Source: World Bank.
Notes: EMDEs: emerging market and developing economies. Forecast errors computed as the difference between actual global growth and forecasts at the beginning of each calendar year. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights.
Sharper impact for some oil exporters
Among commodity exporters, fiscal consolidation was less pronounced and economic activity recovered more quickly in countries with flexible exchange rates and higher levels of export diversification.
Change in overall fiscal balance in oil-exporting EMDE sub-groups
Sources: International Monetary Fund, World Bank.
Sources: International Monetary Fund, World Bank.
Notes: EMDEs: emerging market and developing economies. Sample includes 27 oil-exporting EMDEs (excludes Albania, Bolivia, Brunei Darussalam, Ghana, Libya, Myanmar, South Sudan, and Turkmenistan). Change in overall fiscal balance is measured from 2014-16. Exchange rate classification is based on the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions database, in which countries are ranked 0 (no separate legal tender) to 10 (free float). “Pegged” denotes countries ranked 1 to 6. “Floating” denotes countries ranked 7 to 10. Above average and below average oil revenue groups are defined by countries above or below the sample average of oil revenues as a share of GDP based on 2014 data.
Need for greater diversification for oil exporters
Although low oil prices spurred significant policy responses in oil-exporters, more sustained reform efforts will be needed given subdued long-term prospects for oil prices. Oil exporters still have among the lowest levels of export diversification of any other country group.
Export concentration, 2016
Sources: United Nations Conference on Trade and Development (UNCTAD), World Bank.
Sources: United Nations Conference on Trade and Development (UNCTAD), World Bank.
Notes: EMDEs: emerging market and developing economies. Orange diamonds denote the median and blue bars represent the interquartile range of individual country groups. Sample includes 34 oil-exporting EMDEs (excludes South Sudan), 116 oil-importing EMDEs, and 36 advanced economies. Concentration index measures the degree of product concentration, where values closer to 1 indicate a country’s exports are highly concentrated on a few products.
Long-term price forecast downgraded
Long-term oil price forecasts have been considerably downgraded over the last few years, and numerous factors limit upside risks to the outlook. These include: the potential for further gains in shale oil production, an accelerated uptake of more fuel-efficient technologies, and policies supporting renewable energies.
Oil price forecasts
Source: World Bank.
Source: World Bank.
Note: Forecasts from various editions of World Bank’s Commodity Markets Outlook report.
Hangover from the price plunge
The 2014–16 oil price plunge has cast a long shadow for oil exporters. Significant declines in investment and output generally lead to weaker potential output growth over extended periods of time. Expectations of markedly lower-than-expected oil prices ahead underscores the urgency of reforms to restore growth and fiscal sustainability.
EMDE potential growth response to contraction events
Source: World Bank.
Source: World Bank.
Notes: EMDEs: emerging market and developing economies. Contractions are defined as the years of negative output growth from the year after the output peak to output trough, as in Huidrom, Kose, and Ohnsorge (2016). Sample includes up to 45 EMDEs from 1989-2016. Dependent variable defined as cumulative slowdown in potential growth after a contraction event. Bars show coefficient estimates, while vertical lines show shock +/- 1.64 standard deviations (10 percent confidence bands).
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Authors
Marc Stocker World Bank’s Country Economist for Madagascar
John Baffes Senior Agriculture Economist, Development Economics Prospects Group John Baffeshttps://www.linkedin.com/in/johnbaffes/
Dana Vorisek Senior Economist, Prospects Group https://www.linkedin.com/in/dana-vorisek-7208858/
Download the January 2018 Global Economic Prospects report.
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