The International Monetary Fund is warning that low oil prices have not made it easier for consumers, and in fact could be setting the global economy up for a big fall.
Employment will not pick up until oil prices start climbing again, the global financial organization said in a Thursday summary of its forthcoming 2016 World Economic Outlook to be released next month.
"Moreover, even in the United States, a net oil importer where demand has been fairly strong, cheap oil seems not to have given a substantial fillip to growth," the outlook reads.
Keeping interest rates low in the wake of the recession seem to be the culprit, IMF researchers say.
"Because the policy interest rate cannot fall further, the decline in inflation (actual and expected) owing to lower production costs raises the real rate of interest, compressing demand and very possibly stifling any increase in output and employment," according to the researchers.
The IMF outlook concludes with a warning: "persistently low oil prices complicate the conduct of monetary policy," which "could ignite a variety of dislocations including corporate and sovereign defaults."
Those issues could create a variety of problems "that can feed back into already jittery financial markets," the outlook says. "The possibility of such negative feedback loops makes demand support by the global community — along with a range of country-specific structural and financial-sector reforms — all the more urgent."
The IMF in 2014 had anticipated that low prices would be a "shot in the arm for the global economy," but that appears to have changed with prices dropping to decade lows. The researchers also see a need for advanced economies to make more progress raising interest rates before any impact is felt on the public. Ironically, prices have to rise for any economic benefit to be seen.
"We argue that, paradoxically, global benefits from low prices will likely appear only after prices have recovered somewhat, and advanced economies have made more progress surmounting the current low interest rate environment," the IMF's senior researchers write.
"This outcome has puzzled many observers including us at the Fund, who had believed that oil-price declines would be a net plus for the world economy, obviously hurting exporters but delivering more-than-offsetting gains to importers," the researchers say. Their "key assumption" about how oil-importing nations behave compared to exporting countries appears to have been proven wrong.
"The key assumption behind that belief is a specific difference in saving behavior between oil importers and oil exporters: consumers in oil-importing regions such as Europe have a higher marginal propensity to consume out of income than those in exporters such as Saudi Arabia," they say. But world equity markets "have clearly not subscribed to this theory," which have fallen with low prices. That is "not what we would expect if lower oil prices help the world economy on balance," they say.
"Indeed, since August 2015 the simple correlation between equity and oil prices has not only been positive, it has doubled in comparison to an earlier period starting in August 2014 (though not to an unprecedented level)," the researchers add.
The researchers say both supply and demand are a factor. Slowing demand for oil "is no doubt part of the story, but the evidence suggests that increased supply is at least as important." Oil supply has been strong due to record high output from the Organization of the Petroleum Exporting Countries, including recent exports from Iran, the researchers say. "In addition, the U.S. supply of shale oil initially proved surprisingly resilient in the face of lower prices."
They examined how the Saudis and other OPEC members have continued to increase production as prices have fallen, which hasn't been their policy in the past when prices were low. They have typically cut production at those times. But that doesn't solve the puzzle, the IMF says.