How the Global Fuel Price Slump Impacts on Bangladesh & Global Economy & Markets

Global Crude Oil Markets: A time series analysis

The oil price, refers to the spot price of a barrel of benchmark crude oil. As with all commodities, the oil price is determined by the balance between supply and demand. The supply of oil is dependent on geological discovery, the legal and tax framework for oil extraction, the cost of extraction, the availability and cost of technology for extraction, and the political situation in oil-producing countries. Both domestic political instability in oil producing countries and conflicts with other countries can destabilize the oil price.

From 1999 to 2008, the price of oil rose materially due to rising oil demand in countries like China and India. In the financial crisis of 2007–2008, the price of oil underwent a significant decrease after the record peak of $145 it reached in July 2008. On December 23, 2008, WTI crude oil spot price fell to $30.28 a barrel, the lowest since the financial crisis of 2007–2010 began. The price sharply rebounded after the crisis and rose to $82 in 2009. For about 3.5 years the price remained in the $90–$120 range. In 2014, price started declining due to significant increase in US oil production, and declining demand in the emerging countries. By January 2015 the price of benchmark crude oil reached below $50, with squeezed profits. A record dip below $44 for WTI was reached at March 2015. Oil prices decreased to a six-year low to $36 on December, 2015. Some analysts predicted that it may continue to drop further, as low as $18.

 

Cost of cumulative crude oil production in the fall of 2014:


Source: Scotia Bank Equity Research

The oil price fell rapidly

in the month of January 2016

causing the cost of WTI

Future projections:

The US Department of Energy in the Hirsch report indicates that “The problems associated with world oil production peaking will not be temporary, and past “energy crisis” experience will provide relatively little guidance. The 2014 United Nations World Economic Situation and Prospects report notes that “Oil prices were on a downward trend in the first half of 2013 (after a spike in January and February caused by geopolitical tensions with Iran), as global demand for oil weakened along with the deceleration in world economic growth overall.”

Impact of declining oil price in Global markets:

Low oil prices could make oil-rich states engage more in international cooperation, as they become more dependent on foreign investments. The influence of the United States reportedly increases as oil prices decline, at least judging by the fact that “both oil importers and exporters vote more often with the United States in the United Nations General Assembly” during oil slumps.Lower oil prices lead to greater global trade.The oil importing countries like Japan, China or India would benefit, however the oil producing countries would lose.A Bloomberg article presents results of an analysis by Oxford Economics on the GDP growth of countries as a result of a drop from $84 to $40. It shows the GDP increase between 0.5% to 1.0% for India, USA and China, and a decline of greater than 3.5% from Saudi Arabia and Russia. A stable price of $60 would add 0.5 percentage point to global gross domestic product.

 

 

Implication to Bangladesh Economy: by GDP Composition

  • Consumption: With the slump in global fuel price, it’s expected by the government of Bangladesh to trigger down the selling price of petroleum & liquefied natural gas. Some key International financial intuitions also advised Bangladesh to reduce the price level of fuel price so that inflationary pressure can be curbed & to increase in money supply in the form of consumer spending. As the income of someone is derived by spending of another, it would be wise for Bangladesh to cut the fuel price enhancing economic activities fuelling growth. But Government decided to stabilize the price level with a hope to gain higher profit margin so that Bangladesh Petroleum Corporation (BPC) can be solvent enough to offset its past subsidies on fuel price to the consumers. In addition, Government wants to meet its deficit financing need by utilizing the benefit derived from stable fuel price in Bangladesh to some extent.But till now Government hasn’t made any change in fuel price for meeting domestic demand. As a result, inflationary pressure become unchanged, consumer spending become the same as previous level. As the fuel price is inelastic in nature, domestic consumers are bound to pay the same amount of money to buy fuel. 

 

  • Investment: If the government of Bangladesh cut the fuel price for domestic economy, private investment would be enhanced materially as fuel is used one of the key input for production of goods & services for our economy. Producers would get huge benefits in the form of high profit margins & price regulatory authority could control/reduce the price level of commodities efficiently. Inflation would be curbed & investment would be increased with growth opportunity and new job creation for Bangladesh.But as the government didn’t cut the fuel price level for domestic economy, private investment can’t be attracted for the entrepreneurs. But in case of public investment, its act as a stimulus as it drives higher cash flows to government account.

 

  • Government Spending: Government spending has increased significantly in the form of some mega construction projects (like Padma bridge, flyover projects etc), increase in public salaries, new power plants start-up & IT infrastructural projects. The spending has been enhanced by the stable fuel price decision which enables the government to gain significant economic benefit in the form of higher profit margin out of fuel sales.

 

  • Net Export: Global fuel price slump may weaken the foreign currency of petroleum producing countries to some extent i.e. Middle East, Gulf etc where Bangladesh has manpower in the form of efficient & inefficient labor. In addition, we have dependency on European countries & Middle East in the form of clothing export & import of consumer goods. Due to possible variability of exchange rates between Bangladesh & the Petroleum producing countries, it would be difficult to manage cross boarder financial management of the exporters & importers of Bangladesh to optimize benefit out of bilateral trade.If Government of Bangladesh trigger down the price level of fuel, economy would be fueled with higher money supply & private investment which would stimulate the exporters & importers to increase production & sales. As a result there would be potential gain of international trade & the trade deficit would likely to be minimized.

 

Implication to Capital Market of Bangladesh: Key Sectors

 

Disclaimer: This publication is produced by Research and Innovation Lab at Royal Capital Limited (RCL) solely for the information of Clients of RCL. Clients are expected to make their own investment decisions using any information contained herein. The contained information in the report should not be interpreted as an offer to sell, or a solicitation of any offer to buy any investment. Projections of potential risk is based on published information but does not guarantee of any actual risk or return to be materialized.

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