Fall in Oil Prices

The unexpected fall in world market prices for oil in the second half of 2014 is comparable to two other recent episodes: in 1986 and 2008-09. The price drop has lowered the cost of living and increased real incomes for consumers in countries where the price declines have been passed on to users. Similarly, firms using oil in production have benefited from lower input prices in these countries. The implied decline in firms 'marginal costs should translate into lower producer prices for their goods and services. These real income gains should result in higher spending and, other factors unchanged, a boost to global growth. This "demand channel" plays an important role in the transmission of the fall in oil prices, and much depends on how large the real income gains are. But the flipside to windfall gains is the income losses of oil producers. The full global economic impact depends on a number of factors, including the nature and magnitude of the oil price decline and the size of the price decline experienced by oil users, among others.