Cheaper oil will not boost global growth – Moody’s

Business News of Thursday, 12 February 2015

Source: BBC

Jubilee Oil Rig

Lower oil prices will fail to give a “significant boost” to global growth in the next two years, Moody’s has said.

The ratings agency said any boost from cheaper oil would be offset by the eurozone’s economic woes as well as slowdowns in China, Japan and Russia. As a result, Moody’s said it would not be revising its growth forecasts for the G20 countries.

“For the G20 economies, we expect GDP growth of just under 3% each year in 2015 and 2016.” This was unchanged from 2014 and from its previous forecast, Moody’s said. Marie Diron, the author of the report, said: “Lower oil prices should, in principle, give a significant boost to global growth.

“However, 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.”

Moody’s said the European Central Bank’s quantitative easing programme would give a slight boost to the eurozone by weakening the euro. However, it said: “Weak demand in the euro area suggests that companies will have to pass on the lower energy costs, limiting the potential for higher profit margins.”

One of the countries that should see a boost from cheaper oil is the US. Moody’s said, which will benefit through “higher consumer and corporate spending”.

Moody’s global growth outlook is based on the assumption that Brent oil prices will average $55 (£37) a barrel in 2015, rising to $65 on average in 2016. Oil prices were trading at about $115 a barrel last summer.

Separately on Wednesday, PwC released a report detailing the difficulties facing the UK’s oil and gas industry. PwC argues that many oil and gas firms will need to transform the way they operate, given the recent plunge in oil prices.

Brian Campbell, oil and gas capital projects director at PwC and co-author of the report, said: “With economists predicting low oil prices throughout 2015, UK oil and gas firms are not out of the woods by any means.

“They are still at risk of an economic triple-whammy: as the falling oil price reduces income, incremental investment may no longer be economic with a risk that field life diminishes and decommissioning is accelerated.

“The stark reality is that firms need to be able to operate in an environment where oil averages at $50 per barrel – only then can it be truly fit for the future.”

Also on Wednesday, Tullow Oil became the latest oil company to see its profits hit by falling crude prices.

It reported a $2.05bn full-year pre-tax loss – its first for 15 years – mainly due to a previously-announced asset write-down of $2.2bn. Sales revenues fell 16% to $2.2bn. The Africa-focused oil and gas explorer has also scrapped its dividend.

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