Crude oil doesn’t necessarily spring to mind when one thinks of natural wealth redistributors.
Yet in 2010 the transfer of income from oil-importing countries to oil-exporting countries amounted to some $1,600bn — or 2.6 per cent of the importers’ GDP. With oil prices now hovering around $110 a barrel that redistribution will only increase. The barrel bill, so to speak, is about to get bigger.
Here’s Morgan Stanley’s Spyros Andreopoulos:
Higher oil prices redistribute income and hence demand from oil-importing economies to oil-exporting economies. This redistribution aspect provides a useful angle on the economic effects of oil price shocks … As oil exporters save more than importers, on net demand is destroyed in the global economy. We ask the following questions: 1) what is the size of the current wealth transfer from oil importers to exporters? 2) How much of this flows back into oil-importing economies through goods imports of the oil exporters, and hence how much demand is actually destroyed? 3) What does the transfer mean for asset markets? 4) How high will the income transfer and demand destruction be if oil prices rise further? And 5) What are the consequences for the global economy?
Answers: 1) Nearly US$2.4 trillion, or more than 3.5% of oil importers’ GDP. 2) Around half, as oil exporters have been spending 50% of their revenue on goods imports from oil importers in recent years. Going forward, this ratio may be materially higher, as some oil exporters could step up spending to maintain political stability. 3) Probably somewhat less than the remaining 50% not spent on goods imports will be saved and hence support global asset markets – our rough estimate puts this figure at around US$1 trillion. 4) If the price of crude were to average US$140/barrel for the whole of 2011, the (gross) transfer would be just shy of US$3 trillion, or 4.5% of net oil importers’ GDP. 5) Our global economics team’s scenario analysis suggests that an average price of US$140, sustained for the whole of 2010 and 2011, would result in stagflation for the global economy.
The good news for oil importers comes in those second and third points — the $2,400bn won’t be gone forever. Morgan Stanley expects about half of the oil money to flow back to the countries via imports (maybe even more) and about $1,000bn to wind its way back into international asset markets.
The bad news is that net demand is still being destroyed — albeit not as much as some might expect:
Any increase in oil prices increases the income transfer from oil importers to oil exporters. The global economy slows as a consequence because this redistribution of income means a net destruction of demand, since oil exporters on aggregate have a higher saving rate.
Related links:
Supply destruction in the oil market - The Daily Reckoning
Oil spike to hit West harder than emerging economies – Reuters
