Hey wealthy, oil-importing nations. Would you like to be wealthier?
Credit Suisse analysts James Sweeney and Axel Lang say that the dramatic slump in the price of crude oil will lead to a massive shift in wealth from oil producers to oil consumers. In research published on Wednesday, they argue that the recent oil price drop means we have just witnessed the sixth big "regime shift" in crude since OPEC was formed in the early 1970s.
You can see the drama in the chart below. Of note is the swiftness of the shocks. In the most recent jolt, oil fell 59 percent from its peak in a matter of months.
While slumping crude prices can be detrimental to an oil-importing economy in the short-term, thanks to cuts in energy-related investment, Sweeney and Lang reckon that this particular price fall will eventually end up boosting US and even global growth quite significantly. How exactly will that boost be achieved? The reasoning is simple. Oil-importing countries pay for oil by borrowing from foreigners, selling assets or cutting spending. As the importers spend money to buy crude, oil exporters accumulate foreign assets (through sovereign wealth funds) or spend money on non-energy related imports (ferraris, construction materials for shiny new buildings).
You can see one half of the dynamic in the below chart, which shows the net international investment position of the US and oil balance.
Because the US has run constant oil deficits since the 1970s, there has been a large and steady accumulation of claims on the US by oil exporters. Assessing “causation” from one source of trade to the general balance of payments or net investment trends is a dangerous thing, but the straightforward observation that there has been a massive outflow of wealth from the United States as a result of its constant energy deficits is undeniable.
As the price of oil falls the historic dynamic between importers and exporters is reversed, resulting in a not-insubstantial wealth transfer to countries like the US.
In fact, by Credit Suisse estimates the cumulative sum of energy deficits is 50 percent of U.S. GDP, or a whopping $9 trillion.
In short, the fall in oil prices, if it lasts, means the rich countries just got richer.