As oil prices fall sharply, is this a worrying sign for the health of the global economy?

Ole Hansen is head of commodity strategy at Saxo Bank, says Yes.

The sharp drop in oil comes at a time of rising global tensions. IS militants are causing havoc in the Middle East, while deteriorating relations between Russia and the West have triggered something akin to a new Cold War. Lower oil prices mean lower revenues for oil producers, and that’s one thing that they don’t need right now – it could raise tensions even more. Opec and Russia need high prices to balance their books, while US shale oil producers, who are largely responsible for the current slump, need high prices to remain profitable. Lower prices could raise global tensions even further, and could also prompt a sharp reduction in oil supplies, as high-cost producers would simply stop pumping. Moreover, oil at $100 plus per barrel over the past four years has helped ramp up the search for alternatives, including renewables. A sharp drop in oil prices may curb these alternative initiatives, and this could mean higher oil prices further down the road.

Tom Pugh is commodities economist at Capital Economics, says No.

Some of the recent fall in oil prices is due to weaker demand from China and the Eurozone. But more important factors have been booming supply, the strength of the dollar and panic in oil markets, as traders sell on fears of further falls. Other, more reliable, bellwethers of the global economy – such as industrial metals prices and PMI surveys – have held up much better. Whatever the reason for the crash, it should actually be positive for global growth. A $10 fall in the price of oil transfers the equivalent of 0.5 per cent of world GDP from oil producers to oil consumers, and net consumers generally spend a higher proportion of their income. What’s more, lower oil prices could reduce headline inflation in the OECD by as much as half a percentage point. While this could tip the Eurozone into deflation, it should also allow monetary policy to stay looser for longer across the developed world.

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