WASHINGTON D.C. – The World Bank says gains from low oil prices can be substantial for the Caribbean and other developing-country importers if supported by stronger global growth.
In analyzing oil price decline, the Washington-based financial institution in its latest edition of “Global Economic Prospects”, released on Wednesday, said the decline reflects a “confluence of factors.”
This includes several years of “upward surprises” in oil supply and “downward surprises” in demand, receding geopolitical risks in some areas of the world, a significant change in policy objectives of the Organization of the Petroleum Exporting Countries (OPEC), and appreciation of the US dollar.
“Although the relative strength of the forces driving the recent plunge in prices remains uncertain, supply related factors appear to have played a dominant role,” said the bank, adding that soft oil prices are expected to persist in 2015 and will be accompanied by significant real income shifts from oil-exporting to oil-importing countries.
For many oil-importing countries, the World Bank said lower prices contribute to growth and reduce inflationary, external and fiscal pressures.
At the same time, the bank said weak oil prices present “significant challenges for major oil-exporting countries, which will be adversely impacted by weakening growth prospects, and fiscal and external positions.
“If lower oil prices persist, they could also undermine investment in new exploration or development,” it said. “This would especially put at risk investment in some low-income countries, or in unconventional sources such as shale oil, tar sands and deep sea oil fields.”
Ayhan Kose, Director of Development Prospectsat the World Bank, said for policymakers in oil-importing developing countries, the fall in oil prices “provides a window of opportunity to undertake fiscal policy and structural reforms as well as fund social programs.
“In oil-exporting countries, the sharp decline in oil prices is a reminder of significant vulnerabilities inherent in highly concentrated economic activity and the necessity to reinvigorate efforts to diversify over the medium and long term,” he said.
The analysis on oil prices in Global Economic Prospects is complemented by two special features on how trends in global trade and remittance flows are impacting developing countries.
The World Bank said global trade expanded by less than 3.5 percent in 2012 and 2013, well below the pre-crisis average annual rate of 7 percent, “holding back developing country growth in recent years.”
Weak demand, mainly in investment but also in consumer demand, is one of the main causes of the deceleration in trade growth, the bank said.
Since 2000, the World Bank said remittances to the Caribbean and other developing countries have averaged about 60 percent of the volume of total foreign direct investment flows.
For many developing countries, remittances are the single largest source of foreign exchange, the bank said.
The study finds that, in addition to their considerable volume, remittances are more stable than other types of capital flows, even during episodes of financial stress.