Low oil prices may be playing havoc with global markets at the moment but Mark Carney is a fan.
Asked if low oil prices were good for the economy in the long run, the Bank of England governor told MPs on Tuesday: “Yes. I would pull it forward from long term to the medium term.
“When you have a dislocation that flows through to financial asset prices it obviously has a dampening effect and some of the capital adjustments may be more rapid than the consumer adjustments.
“But we’ve already seen the consumer payment, for example in auto sales in the US. It’s a net positive for the global economy, in my view.”
The price of a barrel of oil has collapsed from over $100 (£70) 18-months ago to below $30 (£20.90) a barrel. The world is suffering from an oversupply as OPEC nations, led by Saudi Arabia, pump out more and more of the black stuff in a bid to strangle competition from US shale producers.
The idea is to force the price so low that it puts US oil companies out of business, while OPEC swallows losses. Prices look like falling further — or at least not rising anytime soon — with Iran set to introduce more supply to the market when sanctions lift shortly.
The collapse in oil prices has largely been seen as a bad thing so far. It’s putting companies out of business and leading to huge numbers of layoffs at giants like Shell. It’s also depressing spending power in oil-dependent emerging markets like Brazil, where consumer-facing companies such as Unilever get a lot of their sales from.
But Carney’s point is that, for Brits and others in the developed world, it’s largely a good thing. As oil prices fall, so do petrol prices. That boosts car sales and also means consumers have more money in their pockets to spend on other goods and services, boosting growth.
The cost of many goods will also likely fall as production costs fall in line with the oil price, which should lead to higher sales.
Carney’s comments came as he and colleagues were quizzed by Parliament’s Treasury Select Committee on all things financial and economic safety.
Carney was also asked about whether he thought the current oil price squeeze would spell the end of OPEC, a question he carefully tip-toed around.
Carney said: “The ability of OPEC — given technological developments and the spread of potential supply — the ability of OPEC to influence the global price has been diminished, but the competitive position of the major OPEC suppliers — particularly Saudi Arabia — is unrivalled. Over the medium term, OPEC having some influence at a much lower price is a possible scenario.”
Carney also addressed current ructions in China’s stock markets, saying: “The causes of recent events… originate, in my opinion, to some of the problems we identified in the Financial Stability Report — the strains of adjustment to very high build ups of private debt and quasi-private debt and a broader suite of emerging markets, combined with the repatriation of capital flows or in the case of China, the increase and acceleration of capital outflows.
“The risks in the global economy are shifting from advanced economies to developing economies and what we’re seeing at the moment is a crystallisation of that.”
But Carney thinks developed economies like Britain and the US are safe for now, saying: “There is a question that is being asked about the momentum that remains in the global economy. Our sense, and the MPC [the Bank of England’s Monetary Policy Committee] is in the process of updating its forecasts, is that at the core of the advanced economies there is solid growth.”
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