Why is Moody so Moody about Low Oil Prices?

In theory, low oil prices should provide a boon to trade and industrial growth, and could prove to be a much needed boost to worldwide economies. And although oil prices have hit a 2015 high, rating’s agency Moody’s Investors Service are not so positive. In its latest report – titled Lower oil price fails to spur global growth - Moody’s said that despite some economic gains from low prices, oil importers face several challenges which will offset any potential gains.

“Such a large and sustained fall in oil prices would typically provide a sizeable boost to the global economy in general and in particular the G20 economies, most of which are net importers of oil. Yet, we are not revising up our global growth outlook,” said Marie Diron, Moody’s senior vice president of credit policy.

Moody’s believe that events in the Eurozone, Russia and China will outweigh any possible economic growth. As such, they are sticking to their earlier estimates for growth, fixed at less than 3% for G20 countries.   

Low oil prices do cut costs for both businesses and consumers, and can have an effect on inflation rates, but these gains will be matched by other factors.

Worries about employment, where people tend to save than spend money, and areas of political unrest, Moody’s believe, will cause uncertainty on global economy.

“A range of factors will offset the windfall income gains from cheaper energy. In the euro area, the fall in oil prices takes place in an unfavourable economic climate, with high unemployment, low or negative inflation and resurgent political uncertainty in some countries,” said Diron.

In China, any benefit of lower oil prices will be affected by higher taxes on energy, and price controls by the government. Other big oil producers, such as Russia and Saudi Arabia, will have to face Moody’s prediction of a Russian recession for the next couple of years.

“In Russia, the slump in oil prices exacerbates the economic effects of a pre-existing downward trend in the economy’s potential and the geopolitical crisis. We forecast a sharp recession that will last until 2017,” Diron advised. The agency also point towards the Eurozone. They cite the possible departure of Greece from the euro as having potentially negative consequences for the rest of the union. “This exit from the monetary union could have negative credit implications for other members of the single currency, despite contagion risks being materially lower than at the peak of the crisis," Diron said.

There are a few winners of lower oil prices according to Moody’s. They expect the US, India and G20 countries to benefit. As for the rest of the world, it is not all doom and gloom. Moody states that if these factors are taken ‘in isolation’, they would not prove to have a globally significant impact.