The Great Plunge in Oil Prices: Causes, Consequences, and Policy Responses

By J. Baffes, M. Ayhan Kose, F. Ohnsorge, Markus Stocker, Kaushik Basu, D. Chen, D. Cosic, Xinghao Gong, Raju Huidrom, Ekaterine T. Vashakmadze and 1 more. 2015

307 citations recorded by the source corpus.

This note combines and distills existing and new research to inform discussion on the topical policy issue of oil prices. Following four years of relative stability at around $105 per barrel (bbl), oil prices have declined sharply since June 2014 and are expected to remain low for a considerable period of time. The drop in prices likely marks the end of the commodity supercycle that began in the early 2000s. Since the past episodes of such sharp declines coincided with substantial fluctuations in activity and inflation, the causes and consequences of and policy responses to the recent plunge in oil prices have led to intensive debates. This paper addresses four questions at the center of these debates, with particular emphasis on emerging market and developing economies: 1) How does the recent decline in oil prices compare with previous episodes? 2) What are the causes of the sharp drop and what is the outlook for oil price? 3) What are the economic and financial consequences? 4) What are the main policy implications? The decline in oil prices will lead to significant real income shifts from oil exporters to oil importers, likely resulting in a net positive effect for global activity over the medium term. However, several factors could counteract the global growth and inflation implications of the lower oil prices. These include weak global demand and limited scope for additional monetary policy easing in many countries. The disinflationary implications of falling oil prices may be muted by sharp adjustments in currencies and effects of taxes, subsidies, and regulations on prices. Regarding fiscal policy, the loss in oil revenues for exporters will strain public finances, while savings among oil importers could help rebuild fiscal space. Lower oil prices also present a window of opportunity to implement structural reforms. These include, in particular, comprehensive and lasting reforms of fuel subsidies, as well as energy taxes more broadly.

Subfields: Economics and Econometrics, Renewable Energy, Sustainability and the Environment

View Paper: https://www.semanticscholar.org/paper/aa3a5ee7d04f23b6281ed84f7097b23c088d9567

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Citations in the corpus

Structural Interpretation of Vector Autoregressions with Incomplete Identification: Revisiting the Role of Oil Supply and Demand Shocks (2019, result): “That finding differs from that of Baffes et al. (2015) but is consistent with the conclusions of Hamilton (2015) and Baumeister and Kilian (2016). Our estimates attribute most of the oil price rebound in 2016 to strong demand.”
Improving the predictability of the oil–US stock nexus: The role of macroeconomic variables (2019, background): “For instance, an increase in shale oil production coupled with a reduction in US imports of crude oil has been proposed as one of the main causes of the 2014 oil price crash (Baffes et al., 2015).”
Inflation and exchange rate pass-through (2019, background): “…to zero during the economic recovery in the early 2000s and during the global financial crisis, but it became increasingly positive after 2010 amid deteriorating supply-side conditions in many countries, including commodity exporters facing the end of the commodity supercycle (Baffes et al. 2015).”
Quantitative Effects of the Shale Oil Revolution (2015, unknown): “In contrast, Baffes et al. (2015) ﬁ nd that supply shocks accounted for roughly twice as much as demand shocks in explaining the drop in oil prices during the recent episode.”