What Will Lift World Economy? Goldman Says Higher Oil Pricesby
Oil incomes create ‘global liquidity’ that boosts asset values
Changes in financial markets during 2000s transformed savings
Forget the stagflation of the 1970s. Higher oil prices would be a boon for the global economy, according to Goldman Sachs Group Inc.
Pricey crude means economies such as Saudi Arabia take in more money than they can spend, which financial markets help distribute through the rest of the world, boosting asset values and consumer confidence, the bank’s analysts Jeff Currie and Mikhail Sprogis wrote in a Nov. 22 research note.
It’s a counter-intuitive notion, especially for anyone who lived through the 1970s, when Middle East turmoil hiked oil prices and pushed much of the developed world into recession. Back then, high oil prices meant money flowed from developed economies where consumption was high to emerging economies where consumption was low, taking money out of circulation and stagnating the economy.
Things changed in the 2000s, Currie and Sprogis wrote. Modern financial systems took savings that were building up in lower-consumption, oil-producing countries and circulated them around the world. The theory helps explain why the global economy surged in the 2000s as oil climbed above $100 a barrel and then slowed amid the recent crude crash, according to Goldman.
“The difference between today and the 1970s is that oil creates global liquidity through a far more sophisticated financial system,” Currie and Sprogis wrote. “More sophisticated financial markets in the 2000s were able to transform this excess savings into greater global liquidity that increased asset values, lowered interest rates, and improved credit conditions that spanned the globe.”
Goldman earlier this week raised its forecast for West Texas Intermediate crude prices in the first quarter to $55 a barrel, from $45, as it expects the Organization for Petroleum Exporting Countries to agree on a production cut next week. Such a boost should be viewed as a positive for global growth, Currie and Sprogis wrote. WTI for January delivery traded at $47.95 a barrel, down a cent, at 10:12 a.m. Singapore time.
Goldman is the biggest commodities dealer on Wall Street by sales and for that reason the views of its analysts carry extra weight among natural resources investors.
From 2001 to 2014, excess savings outside the U.S. grew to $7 trillion from $1 trillion as oil climbed, according to Currie and Sprogis. The savings helped drive up values of things like homes and financial assets and loosened credit markets for consumers.
In 2014, when oil prices began to fall, Middle Eastern economies began eating into their savings to meet budget requirements, reducing global liquidity. The correlation between oil prices and global growth won’t last forever. When these economies set their budgets so that spending and oil revenue are the same, the financial spillover effects will stop as they did in the 1980s and 1990s, Currie and Sprogis wrote.