>What will happen if the oil price falls to USD 40 per barrel again in 2010?

One should absolutely not underestimate the possibility that the oil price will fall to USD 40 per barrel again in 2010: growth in OECD countries will decline significantly from its 2009 trend; the speculative oil stockpiles may shrink; there is still enormous excess production capacity and OPEC’s discipline may disappear if oil prices start to fall.

The effects of far less expensive oil in 2010 are known: stimulation of consumption, but negative inflation again in OECD countries, and therefore extension of the period of highly expansionary monetary policy since consumption will remain sluggish; difficulties for some oil-producing countries: Russia, Iran, Venezuela; appreciation of the dollar against the euro.

1. It is entirely possible that the oil price will slip back (to USD 40 per barrel??) in 2010.
2. What would happen if the oil price fell back to USD 40 per barrel in 2010?

The consequences of a low oil price again in 2010 are quite clear:

a) Stimulation of consumption in OECD countries, as in the second half of 2008 and at the beginning of 2009, by the fall in energy prices, and hence a decline in inflation (Charts 8A
and B), which bolsters real wages (Chart 8C).

b) As inflation will become very low again and growth will be very modest, despite the fall in the oil price, monetary policies in OECD countries are likely to remain highly expansionary.

c) Oil-producing countries that need a high oil price to balance their budgets (Russia, Venezuela, Iran, Chart 10A) will again face problems.

d) Pick-up in the dollar against the euro; it is well known that when the oil price is high, the dollar depreciates against the euro (Chart 11); this is in all likelihood accounted for by the fact that oil-producing countries invest a substantial part of their dollar-denominated oil revenues in euros.

To read the full report: OIL