A Bank of America analyst says that the low price of oil effectively moves $2 Trillion a year from oil producers to consumers and is one of the largest transfers of wealth in human history. Bloomberg Business reports the story.
Optimists argue that cheap oil is a good thing for consumers and commodity-sensitive businesses, while pessimists point to the hit to energy-related investment and possible spillover into the financial system.
A new note from Francisco Blanch at Bank of America Merrill Lynch, however, puts the oil move into a much bigger perspective, arguing that a sustained price plunge “will push back $3 trillion a year from oil producers to global consumers, setting the stage for one of the largest transfers of wealth in human history.”
What is the spinoff of low oil prices and the huge transfer of wealth that it entails?
Blanch and his team already see evidence that the fall in the price of crude is having a positive impact on demand, and say that it could accelerate even further if prices don’t pick up.
Meanwhile, in emerging markets, where much of the story of late has been about disappointing economic growth, Blanch still sees huge upside potential in terms of automobile penetration and consumption.
Take China for example, where the strategist sees the oil plunge helping to fuel a boom in SUV sales: “Moreover, the low oil price is encouraging Chinese consumers to buy increasingly larger cars. Sales of SUVs, the heaviest passenger vehicles category, are up 60 percent year-on-year in the last three months, while overall passenger vehicle sales are growing robustly at 22 percent.”
Money is going out of the pockets of oil companies and oil producers like Saudi Arabia and is effectively being transferred to consumers across the globe. How long will this last?
Supply and Demand
Analysts blame a slowing Chinese economy and increased U.S. crude oil production for the dramatic fall in oil prices. If the current situation and one of the largest transfers of wealth in the history of the world is to continue these factors need to continue. Forbes looks a China and crude oil prices in 2016.
Since China accounts for a large share of the global demand for oil, a slowdown in its economy is likely to result in a further decline in crude oil prices in the coming months. Additionally, the depreciation of the Chinese Yuan, and the rising debt levels in the country, have been adding to the insecurities of the investors across the globe. Hence, in this article, we aim to discuss the economic conditions prevailing in the Chinese economy and their potential impact on crude oil prices over the course of the year.
China surpassed the US to become the world’s largest net importer of petroleum and other liquids in 2013, on the back of its rising oil consumption.
Chinese government to is trying to move from an economy focused on manufacturing and exporting to a consumer driven economy. If that move is successful it will probably reduce China’s demand for imported oil and drive prices lower. If China experiences an economic hard landing its demand for oil could drop more than expected. In the meantime there are oil producers across the globe who are losing money pumping oil at current prices. To the extent that these producers fall out, prices could rise putting to an end what could otherwise be the largest transfer of wealth in the history of the world.