With oil prices trending lower again, what would Brent crude falling as low as $20 per barrel mean for the global economy?
If we do get a renewed bout of oil weakness that keeps oil as low as $20 per barrel for a while, the big fear is that it will be associated with a further slowdown in China and volatility in financial markets.
When we run such a weak oil scenario on our global model we find global inflation would drop to 2.1 per cent in 2016, from 2.6 per cent in 2015.
Just under a quarter of the largest global economies could experience negative inflation for two consecutive years, prompting concerns that low inflation expectations could become entrenched. Deflation in the Eurozone would be a particular concern.
The $20 per barrel scenario scuppers central banks’ escape from zero, and their limited scope for intervention weakens an important stabiliser. Among the 22 largest advanced economies, only Australia would have policy rates over one per cent in 2016.
So how bad could it get for commodity producers? Horrible, if the past is any guide to the future.
In the 1980s, crashing commodities were a precursor to swathes of defaults in emerging markets, with pretty much only the wealthy Gulf economies avoiding such ignominy.
The debt levels of Chile and Nigeria increased more than 100 per cent of gross domestic product in just a few years.
But again, things were different back then in some key respects.
There was stagflation with US interest rates peaking at an incredible 15 per cent, triggering the defaults.
This time round deflation fears lead to helpfully low global interest rates, so commodity producers have more time to do some painful fiscal adjustment.
Some – including Russia – have already taken steps that were painful. The fiscal adjustment hurt Russians, the exchange rate adjustment hurt holders of Russia’s assets.
Others countries like Saudi Arabia, Qatar and Norway can also afford to smooth things over (and keep the oil pumping).
And then there are a string of other producers for whom only time will tell.
Commodity producers have famously bad institutions and governance. Many are not keen to adjust, still less keen to ask the IMF for help.
Which producers are most vulnerable?
Venezuela will default at some point, and markets are nervous about others ranging from Ecuador to Mongolia.
And although defaults are unlikely to be very widespread; big depreciations are. And they may feel just as bad if you hold the assets.
Russia. Brazil and Colombia were painful. They won’t be the last.