Adding Fuel To The Fire: Cheap Oil During The Pandemic

CHAPTER 4
Adding Fuel to the Fire:

Cheap Oil during the Pandemic
G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 4 183
The outbreak of COVID-19 and the wide-ranging measures needed to slow its advance have precipitated an
unprecedented collapse in oil demand, a surge in oil inventories, and, in March, the steepest one-month decline
in oil prices on record. In the context of the current restrictions on a broad swath of economic activity, low oil
prices are unlikely to do much to buffer the effects of the pandemic, but they may provide some initial support
for a recovery once these restrictions begin to be lifted. Like other countries, energy-exporting emerging market
and developing economies (EMDEs) face an unprecedented public health crisis, but their fiscal positions were
already strained even before the recent collapse in oil revenues. To help retain access to market-based financing
for fiscal support programs, these EMDEs will need to make credible commitments to a sustainable
medium-term fiscal position. For some of them, current low oil prices provide an opportunity to implement
energy-pricing policies that yield efficiency and fiscal gains over the medium term.
Introduction By one measure, the European Brent spot price,

the oil price fell by 85 percent between January
Since March, oil markets have been buffeted by an 22, when the first human-to-human transmission
exceptional confluence of demand and supply of COVID-19 was announced, and its trough on
shocks that have culminated in an unprecedented April 21—more than at the height of the global
collapse in oil prices. The COVID-19 pandemic financial crisis (70 percent from end-August to
and the measures deployed to contain its spread— late-December 2008) and more than the plunge
quarantines, travel restrictions, shutdowns of during the whole period of end-June 2014 to mid-
non-essential activities—have caused severe January 2016 (77 percent).1 The West Texas
economic dislocations. Governments have Intermediate oil price fell into negative territory
responded with programs to mitigate personal on April 20.2 Since then, Brent oil prices have
hardship and disruptions to economic life, and regained some ground but, at around $30 per
central banks have cut policy rates and injected barrel on average in the first three weeks of May,
liquidity on an extraordinary scale. Many remain less than half their January average and
countries have nevertheless suffered deep around the January 2016 trough of the oil price
economic contractions, with especially sharp slide of 2014-16.
reductions in travel and transportation—both
In the context of the current widespread and
heavily oil-intensive activities.
severe restrictions on economic activity to stem
The collapse in energy demand came on the heels the spread of the pandemic, low oil prices are
of delays of OPEC and the Russian Federation in unlikely to provide much of a buffer for the global
extending a production agreement in early March. economy. Indeed, there are signs that low oil
This was followed by outright production prices may even be compounding the damage
increases in some OPEC countries (World Bank being done by the pandemic by weakening the
2020). A new agreement between OPEC and non balance sheets of producers. However, high levels
-OPEC producers to curb production was reached of inventories suggest that oil prices may remain
in early April; however, prices fell further after the low for some time, which may provide some initial
announcement. Coupled with the collapse in support for the broader economic recovery once it
global energy demand, global oil inventories have gets underway.
risen steeply and, by June, remaining storage
Against this background, this chapter examines the
capacity may be limited (IEA 2020).
likely implications of the 2020 oil price plunge by
Oil prices have plummeted, recording their largest
one-month fall on record in March (Figure 4.1).
1 Another frequently used measure, the Dated Brent spot price,
fell by 72 percent over this period, on par with the declines during
Note: This chapter was produced by a team led by Franziska these comparator periods for the global financial crisis and the 2014-
Ohnsorge and including John Baffes, Alain Kabundi, Gene 16 price slide.
Kindberg-Hanlon, Peter Nagle, and Collette Mari Wheeler, with 2 This reflected an expiring futures contract and no physical oil
research assistance from Kaltrina Temaj. traded at negative prices.

184 CHAPTER 4 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020
FIGURE 4.1 Oil price decline putting it in a historical context and drawing
Oil prices collapsed in the first quarter of 2020, with March featuring the
lessons from the experience of emerging market
single largest one-month drop on record. Meanwhile, oil inventories have and developing economy (EMDE) energy
risen steeply. exporters and importers during the 2014-16
A. Spot oil prices B. Commodity price changes during
plunge. Specifically, the chapter addresses the
January 22-April 21, 2020 following questions:
• What has been the source of the 2020 oil

price collapse?
• How does it compare with earlier episodes?
• How will low oil prices likely affect the

eventual recovery of EMDE energy exporters
and importers?
C. Largest one-month declines in oil D. Largest cumulative three-month
prices since 1970 declines in oil prices since 1970 Contributions. This chapter adds to the literature
in several ways. First, it is the first comprehensive
analysis of the potential impact of the 2020 oil
price plunge on EMDEs and the global economy.
Second, it puts the current decline into historical
context to allow an assessment of the severity of
the plunge. Third, it draws policy lessons from
previous episodes of sharp declines in oil prices to
examine the implications of the current plunge for
EMDEs.
E. OECD oil inventories F. U.S. oil inventories
Main findings. The chapter presents the following
findings.
• The steepest drop on record. The collapse in oil

prices in March was the steepest one-month
drop on record. A precipitous decline in oil
consumption in the context of still-robust
production has led to a rapid buildup in oil
inventories. By June, remaining storage
Source: Bloomberg; Energy Information Administration; Haver Analytics; International Energy
Agency; Thomson Reuters; World Bank.
capacity may be limited.
Note: Oil price refers to Brent oil prices.
A. January 22, 2020, is the date the first human-to-human COVID-19 transmission was
announced. Last observation is May 20, 2020. Data is from Bloomberg and U.S. Energy Information • Predominantly demand-driven oil price decline.
Administration.
B. “Base metals” is an unweighted average for aluminum, copper, lead, nickel, tin, and zinc.
The oil price plunge since late January mainly
“Agriculture” shows an unweighted average for corn, rice, and wheat. “Oil price” refers to European
Brent spot oil price. Figure shows the change in commodity prices between January 22, 2020, and
reflected a collapse in demand arising from
April 21, 2020, which was the trough in Brent prices. the pandemic and the restrictions that were
C.D. Figure shows the largest declines in oil prices since 1970. Dates on the horizontal axis indicate
the date in which the decline occurred. Months with consecutive declines are omitted. needed to stem its spread. Besides triggering a
E. Days of demand represent the level of OECD oil inventories at the end of the quarter
(government and industry) divided by average daily OECD oil demand. Last observation is 2020 Q1.
global recession, these restrictions severely
F. Last observation is May 15, 2020. disrupted travel and transport, which account
Click here to download data and charts.
for around two-thirds of oil demand. Oil
demand is expected to decline by about 9
percent in 2020—an unprecedented plunge.
Supply-side factors, in particular the initial
delay in agreeing to limit production, added
to downward pressures on oil prices.
• Output losses in energy-exporting EMDEs. This fiscal revenue bases, and enhance fiscal and
latest oil price plunge was preceded by six monetary policy frameworks.
previous plunges over the past half-century.
During past demand-driven episodes, energy Drivers of the oil price
exporters and importers suffered similar initial
output losses (about 0.5 percent) that were plunge
unwound within three years. In supply-driven
oil price plunges, however, energy importers By one measure, the European Brent spot price,
did not witness robust growth pickups but crude oil prices fell by 85 percent between January
energy exporters witnessed similar initial 22nd (the date the first recorded human-to-human
output losses as in demand-driven plunges infection was announced) and their trough of $9
and less than one-third of these losses had per barrel on April 21st before recovering in May
been unwound three years later. This lasting to less than half their January average (Figure
impact of supply-driven oil price plunges may 4.1).3 The oil market has been hit by an
reflect a reassessment of long-term prospects unprecedented combination of demand and
for energy exporters. Energy-exporting supply shocks. The pandemic, and the restrictions
EMDEs with lower debt, more flexible on business and personal activities imposed to
exchange rates, and more diversified export stem its spread, have triggered a global recession,
bases suffered smaller short-term output and a steep drop in the demand for oil (Chapter
losses. 3). Total oil demand fell by almost 5 percent in
the first quarter of 2020, and is projected to
• Potential support for global growth early in a decline 20 percent in the second quarter of 2020
recovery. As long as widespread restrictions (IEA 2020). This coincided with a delay in early
continue to constrain economic activity across March of OPEC and its partners (OPEC+) to
the global economy, low oil prices are unlikely agree an extension of their production cuts (World
to provide meaningful support to global Bank 2020). Meanwhile, petroleum inventories
growth. If anything, the current episode of have risen rapidly and are expected to reach near-
low oil prices holds less promise for a full capacity in June (IEA 2020).
sustained boost to global growth than past
episodes of low oil prices since energy Demand decline resulting from lockdowns. The
exporters entered the current episode with single largest factor driving the collapse in oil
eroded fiscal positions and foreign exchange prices has been the sharp reduction in oil demand
buffers to support their economies, after arising from government restrictions to stem the
having drawn on them to weather the spread of the pandemic. Many countries have
previous oil price plunge of 2014-16. That implemented wide-ranging travel bans, sharply
said, when current pandemic-related reducing the number of flights. Stay-at-home
restrictions ease, excess inventories and low oil orders and a widespread shift to remote working
prices could provide some initial support for have caused the number of passenger journeys to
the revival of global economic activity. plummet. For example, passenger journeys in
China fell by three-fifths compared to their
• Need for policy action. Current low oil prices normal level in March, while subway journeys in
are an opportunity to review energy-pricing New York fell by more than nine-tenths in April
policies, including remaining energy subsidies.
A carefully calibrated design, phasing, and
communication of such reforms is critical for 3 Another frequently used measure, the Dated Brent spot price,
their success. For energy exporters, this most fell by 72 percent over this period, on par with the 70 percent decline
during the global financial crisis (end-August to late December 2008)
recent oil price decline is yet another reminder and the 76 percent decline during end-June 2014-mid-January 2016.
of the urgency to continue with reforms to In late-April, the West Texas Intermediate oil price (a U.S. oil price
benchmark) contract for delivery in May temporarily fell below zero
diversify their economies. These include on concerns about near-full U.S. storage capacity; however, no
measures to strengthen competition, broaden physical oil was traded at negative prices.
FIGURE 4.2 Drivers of the 2020 oil price plunge (Figure 4.2). There has also been a reduction in
Government restrictions to stem the pandemic have disproportionately the volume of shipping, both for consumers (most
disrupted travel and transport, which accounts for around two-thirds of notably cruises) and container shipping for
global oil consumption. Global oil consumption has fallen steeply in the first industry, as a result of shrinking global trade. The
half of 2020. The pandemic has also triggered a global recession that has
sharply reduced oil demand. The initial failure to agree on an extension of unprecedented reduction in transport in many
the production agreement between OPEC and its partners in March countries—which accounts for around two-thirds
(although agreement was achieved in April) added to price pressures.
of demand for oil—has led to a sharp fall in fuel
A. Change in transport demand B. Container shipping throughput
volume growth
consumption.
Demand decline resulting from the economic

downturn. The global recession currently
unfolding, which is on track to be the steepest in
the past eight decades, also reduces global
consumption of oil.4 Declines in economic growth
can lead to sharp falls in oil prices, because of the
high income elasticity of demand for oil. Over the
past two decades, a 1 percentage-point decline in
C. Final oil consumption, by country D. Global oil demand growth income growth in the United States or China has
and sector typically been associated with a 13 and 10 percent
fall, respectively, in global oil prices after one year.
Supply fluctuations. Oil markets have also been

buffeted by production decisions by OPEC and its
partners. Following several years of rapid growth
in U.S. shale oil production and amid falling
global oil demand, the production agreement
among OPEC+ partners failed to be renewed in
early March.5 This exacerbated the initial decline
E. Impact of a 1 percentage point F. Contribution to largest oil price in prices and triggered a further 24 percent fall in
growth decline in major economies on declines since 1970
oil prices prices the day after the announcement. In early
April, OPEC and its partners announced a new
agreement to cut production by a historically large
9.7 percent in May and June that would be
unwound gradually. However, the size of the cuts
was apparently insufficient to reassure markets
that they would offset the decline in consumption,
and oil prices fell further following the
announcement.
Source: Bloomberg; Institute of Shipping Economics and Logistics; International Energy Agency; New
York Metropolitan Transportation Authority; Ministry of Transport of China; World Bank. Net effect: Oil price plunge in 2020 mostly
A. “NYC subway ridership” is the sum of entries into each station in New York’s Metropolitan
Transportation Authority network, which serves a population of 15.3 million people across a 5,000- demand-driven. A structural vector autoregression
square-mile travel area surrounding New York City, including Long Island, southeastern New York
State, and Connecticut. “China passenger journeys” include all daily passenger journeys in China. model helps decompose the oil price decline in
B. Year-on-year growth. Last observation is March 2020.
C. Percent of global oil consumption.
2020 into demand- and supply-driven factors
D. Shaded area shows IEA estimates for year-on-year demand growth in 2020Q2. (Annex 4.1). The decomposition identifies a
E. Based on a Bayesian vector autoregressive estimation. Cumulative response to a 1-percentage-
point decline on oil prices on impact or after four quarters. Orange whiskers reflect the 16th-84th
percentile confidence bands. The model includes U.S. growth, Euro Area growth, 10-year U.S.
government bond interest rate, VIX volatility index, China’s growth, oil price, and commodity-importing
or commodity-exporting EMDE growth over 2000Q1 to 2019Q2. The model has four lags. Aggregate 4 See Baffes, Kabundi, and Nagle (2020); Csereklyei, del Mar
growth rates calculated using GDP weights at 2010 prices and market exchange rates.
F. Chart shows the contribution to explained six-month log changes (in percent) in oil prices. Rubio Varas, and Stern (2016); Gately and Huntington (2002); and
Decomposition based on structural vector autoregression estimation (Annex 4.1). For each of the World Bank (2018a).
seven episodes, only the month with the deepest six-month oil price plunge is shown (consecutive 5 OPEC+ includes all OPEC countries, together with Azerbaijan,
months are not shown). The gap between the total price decline and the contributions of demand
and supply represents speculative demand factor. Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia,
Click here to download data and charts. Sudan, and South Sudan.
positive supply shock—such as would have been FIGURE 4.3 Oil markets during past recessions and
caused by the failure of the OPEC agreement in travel disruptions
early March—as an event that lowers prices and at Travel disruptions in the aftermath of the 2001 terrorist attacks on the
the same time raises both global oil output and United States contributed to a decline in oil prices. During global
recessions, oil prices tended to fall, with the largest declines in the current
industrial production. In contrast, a negative global recession.
demand shock—such as would have been caused
by travel restrictions or falling global growth—is A. Oil price B. Oil consumption growth around
an event that lowers oil prices amid falling oil recessions
output and industrial production. The

decomposition suggests that two-thirds of the
price decline in the six months ending in April
2020 has been due to falling demand.6
Comparison with previous

periods of disruptions
Source: Bloomberg; BP Statistical Review; Energy Information Administration; International Energy
This time, the widespread economic weakness and Agency; World Bank.
travel disruptions have been associated with a A. The y-axis is a price index, with “100=t” indicating prices at the start of the events. The x-axis
shows the passage of time (in days). Start dates for the two events are the first trading day before a
considerably steeper oil price collapse than similar major event occurred: September 10, 2001, for 9/11; and January 22, 2020, for COVID-19. Swath
shows the four global recessions: 1974-75, 1981-82, 1990-91, and 2008-09. For the first two
episodes in the past (Figure 4.3). For 2020 as a recessions, daily data were unavailable, so monthly percent changes were taken (assuming each
month lasts 22 working days).
whole, oil demand is expected to drop by an B. Dates of recessions are taken from Kose, Sugawara, and Terrones (2020). The four recessions
included are: 1974-75; 1981-82; 1990-91; and 2008-09."Before" shows average annual growth rates
unprecedented 9 percent—more than twice as in commodity consumption over the three years prior to the recession. "During" shows average
much as during any previous global recession or annual growth rates of recession years. Note that in 1980 a global slowdown occurred with similar
negative growth rates in consumption; as such the "Before" period covers 1977-79.
oil-specific demand slowdown. Click here to download data and charts.
Global recessions. Prior to this year’s event, there

have been four global recessions over the past 70 Oil consumption also typically fell during these
years: 1975, 1982, 1991, and 2009 (Kose and episodes. The largest decline in oil consumption
Ohnsorge 2019; Kose, Sugawara, and Terrones occurred in 1980-82, when consumption fell by a
2020). In each of these episodes, there was a cumulative 9 percent from its peak in 1979. The
contraction in real per capita global output and supply-driven spike in oil prices in 1980, around
broad-based weakness in multiple indicators of the revolution in the Islamic Republic of Iran,
global economic activity. contributed to the global recession in 1981-82,
which further depressed oil consumption. In
During these recessions, oil prices (and other contrast, the two most recent recessions saw much
industrial commodity prices) fell. The sharpest smaller declines in oil demand. For the 2008-09
declines occurred during the global financial crisis, recession, this reflected the strong shift in global
when oil prices fell by nearly 60 percent over three oil consumption towards China, which continued
months. In most of these recessions, oil prices to grow robustly through the global financial crisis
remained below pre-recession levels for several (Stocker et al. 2018).
years.
Travel disruptions. Measures implemented in
2020 to limit the spread of the pandemic bear
6 In contrast, other research finds that only around one-third of some similarities to the widespread travel
the fall in oil prices can be attributed to demand conditions, while disruptions in the aftermath of the terrorist attacks
supply factors explain most of the remainder of the fall (Groen and
Nattinger 2020). Instead of industrial production as a proxy for oil on the United States on September 11, 2001. U.S.
demand, these other models use asset prices which have considerably airline passenger traffic fell by 30 percent in the
more resilient than real activity indicators (in part reflecting monetary immediate aftermath of the attacks, and remained
policy measures). If anything, other factors, in particular the
widespread anticipation of a failure in negotiations, point to an even as much as 7 percent lower after two years (Ito and
greater role of demand than estimated here. Lee 2005). The attacks also resulted in a sharp
spike in uncertainty and prolonged the recession that might have triggered upturns (Cashin,
following the dot-com collapse in the United Mohaddes, and Raissi 2014; Kilian 2009;
States, and hence the slowdown in global activity. Peersman and Van Robays 2012).
In the aftermath of the 9/11 attacks, oil prices fell • Timing. During oil price plunges, the output
sharply (by one-third over the following two losses in energy exporters materialized more
months), while other commodity prices were quickly than output gains in energy importers,
largely unaffected. Travel disruption dispro- resulting in short-term global growth
portionately affected oil consumption but slowdowns (de Michelis, Ferreira, and
heightened uncertainty and slowing growth also Iacovelli, forthcoming).
weighed on oil demand. However, the oil price
decline was short-lived: within six months, oil • Asymmetries. Uncertainty, frictions, and
prices had returned above their pre-attack levels. asymmetric monetary policy responses can
Oil consumption growth averaged close to zero in create asymmetries that increase the damage
the three quarters following the attacks, down to energy exporters compared with the
from an average of 1.5 percent (y/y) in the benefits to energy importers.9
previous four quarters.
Past oil price plunges
Implications of oil price Features of past plunges. Since 1970, the global
plunges for the global economy has witnessed seven oil price plunges
economy when oil prices fell by 30 percent or more over a
six-month period: 1985-86, 1990-91, 1998, 2001,
Other things being equal, low oil prices might be 2008-09, 2014-16, and 2020.
expected to help boost global growth, including by
stimulating energy-intensive activities such as • Drivers. Oil price plunges in 1990-91, 1998,
travel and transportation. Moreover, by 2001, and 2008-09 were one-half (1998) to
dampening inflation, lower prices would also give entirely (2008-09) demand-driven, whereas
central banks more room to ease monetary policy the oil price plunges of 1985-86 and 2014-16
(Baffes et al. 2015; Ratti and Vespigniani 2016).7 were four-fifths and two-thirds supply-driven,
However, these effects would vary across respectively (Figure 4.2).10
countries: energy exporters in particular would
• Persistence. Oil price plunges associated with
suffer real income losses, which would dampen
global slowdowns were short-lived (1998,
consumption and investment.
2001), with oil prices regaining their pre-
In practice, however, all of the oil price plunges plunge levels in less than four years. In
since 1970 have been accompanied by global contrast, oil price plunges around global
recessions, global slowdowns and, in some cases, recessions (1990-91, 2008-09) and largely
widespread financial crises.8 Three reasons may supply-driven plunges (1985-86, 2014-16)
account for this. were followed by more prolonged periods of
low prices (Figure 4.4).
• Sources. Many of the past oil price plunges
were themselves responses to economic
downturns rather than independent shocks
9 See Hamilton (2011); Hoffman (2012); Jimenez-Rodriguez and
Sanchez (2005); and Jo (2014).

10 The 1990-91 plunge was almost equally demand- and supply-
driven. It reflected a global recession as well as an unwinding of

7 Depending on the source of the fall in oil prices, it may also
supply concerns triggered by Iraq’s invasion of Kuwait. This episode
depress equity markets (Kang, Ratti, and Vespigniani 2016). differs from others in that it unwound a short-lived price spike at the
8 The long-term benefits that may have ensued go beyond the
beginning of the first Gulf War whereas other episodes followed
scope of this section. extended periods of price increases or price stability.
• Depth. Similarly, oil price plunges associated FIGURE 4.4 Oil market developments during past oil
with global slowdowns (1998, 2001) were price plunges
shallower than those around global recessions The oil price plunge in 2020 is only the latest in a series of plunges since
(2008-09, 1990-91) or those associated with 1970. During two of these (1985-86, 2014-16), supply remained robust or
increased as did demand. During three others (2000-01, 2008-09, 1997-
largely supply-driven plunges (1985-86, 2014- 98), demand dropped sharply and, in response, production was reined in.
16). The oil price plunge of 2014-16 was
particularly protracted.
A. Global oil price B. Global oil production
Impact of past plunges. Most of these plunges

were triggered by weakening global growth, which
contributed to the decline in oil prices, and were
followed by slow recoveries (Annex 4.2). Although
virtually all episodes of significant oil price
declines since 1984 have been accompanied by
monetary policy loosening in advanced economies,
several were accompanied or followed by financial
market strains.
C. Global rig count D. Oil demand growth
Empirical estimates. A local projections model is
estimated for 155 EMDEs, of which 36 are energy
exporters, for 1970-2018 (Annex 4.3). The model
estimates the response of real output, investment,
and consumption to the seven oil price plunges
described above over the following five years. It
distinguishes between demand-driven (1998,
2001, 2008-09) and supply-driven oil price
plunges (1985-86, 2014-16). Source: Baker Hughes; Energy Information Administration; International Energy Agency; World Bank.
Note: Horizontal axis shows months (A-C) or years (D) from pre-plunge peak in t = 0. Plunges begin
(t = 1) in March 2020, July 2014, September 2008, December 2000, November 1997, and November
• Demand-driven versus supply-driven oil price 1990, and December 1985. All oil prices scaled such that 100 = pre-plunge peak.
plunges. EMDE output evolved differently in D. Refers to annual growth in refined petroleum consumption, scaled such that 100 = pre-plunge
growth (1989, 1996, 1999, 2007, 2013).
demand-driven and supply-driven oil price Click here to download data and charts.
plunges. In the first year of both supply- and

demand-driven oil price plunges, EMDE
output fell by about 0.5 and 0.3 percent, • Demand-driven plunges: Similar impacts on
respectively (Figure 4.5). The recovery, energy exporters and importers. Demand-driven
however, differed: output recovered after oil price plunges were associated with global
demand-driven oil price plunges and, three recessions or slowdowns, which tended to be
years later, had returned to the baseline; after associated with an initial output decline in
supply-driven oil price plunges, EMDE EMDEs (0.3 percent) in the year of the
output did not recover and remained below plunge that was recouped within three years.
the baseline three years later.11 Output, investment, and consumption in
energy exporters and other EMDEs recovered
together with oil prices.
11 Based on vector autoregression models, existing studies find
wide ranges of impacts. A demand-driven 30 percent oil price decline

• Supply-driven plunges: Lasting impact in energy
reduces output by 0-5 percent over a year or two, an oil-specific exporters. Supply-driven oil price plunges were
demand decline reduces output by 0.3-4 percent over a year or two, associated with initial output losses in energy
and a supply-driven oil price decline reduces output by 0-15 percent
over a year or two. These studies include Aastveit, Bjørland, and exporters of somewhat larger magnitude than
Thorsrud (2015); Baumeister and Hamilton (2019); Baumeister and those associated with demand-driven plunges
Peersman (2013); Cashin, Mohaddes, and Raissi (2014); Killian (0.5 percent in the first year). Almost three
(2009); Kilian and Murphy (2014); Mohaddes and Raissi (2019);
and Peersman and Robays (2012). quarters of these output losses persisted into
FIGURE 4.5 Macroeconomic developments in EMDEs the third year. Three years after the shock,
during past oil price plunges investment and consumption in energy
The global economy has witnessed seven oil price plunges since 1970. exporters were still 1.4 and 0.6 percent,
Supply-driven oil price plunges have been followed by lasting contractions respectively, below baseline levels. These
in EMDE output as a result of steep output losses in energy exporters that
were not offset by output gains in energy importers. Demand-driven
lasting losses may have reflected a reassessment
plunges were followed by shorter-lived output contractions. Those energy of long-term growth prospects of energy
exporters with higher debt and fixed exchange rates witnessed greater exporters in supply-driven oil price drops.
output losses.
Meanwhile, growth gains in energy importers
A. Cumulative impulse response of B. Cumulative impulse response of
were gradual and delayed (de Michalis,
output, by type of oil price plunge output to demand-driven oil price Ferreira, and Iacovelli forthcoming).
plunges
• Policies mattered. Energy-exporters tend to be

particularly hard-hit by supply-driven oil price
plunges, but even in those plunges, energy-
exporting EMDEs with flexible exchange
rates, lower debt, and more diversified export
bases suffered smaller output losses than those
with fixed exchange rates, higher debt, and
less diversified export bases.12
C. Cumulative impulse response of D. Supply-driven oil price plunges: The 2014-16 oil price plunge
output to supply-driven oil price Cumulative investment and
plunges consumption responses in energy-
exporting EMDEs In late 2014, the 50 percent decline in oil prices
between June and November 2014 was expected
to lift global GDP by around 0.3-0.7 percent
(Arezki and Blanchard 2014). The cheaper cost of
a critical input into global production was
expected to raise global activity, and the transfer of
income and wealth from energy-exporting
economies with higher savings rates to energy-
importing economies, with higher propensities to
spend, was also expected to boost global demand
E. Demand-driven oil price plunges: F. Supply-driven oil price plunges: (Baffes et al. 2015; World Bank 2015a). While
Cumulative output responses of Cumulative output responses of
energy-exporting EMDEs energy-exporting EMDEs lower oil prices were expected to depress
investment in the oil industry, this was expected to
be more than offset by the boost to consumption
and energy-intensive sectors (transportation,
manufacturing, and agriculture).
However, the expected “shot in the arm” to global

growth was slow to materialize. Instead, in 2016,
global growth slowed to a near-post-crisis low of
2.6 percent. Global growth only picked up in
Source: Haver Analytics; International Monetary Fund; World Bank.
Note: Cumulative impulse responses of real output (A, B, C, E, F), real investment (D), and 2017-18 once considerable policy stimulus was
consumption (D) in EMDEs (A, B, C) or in energy-exporting EMDEs (D, E, F) in response to an oil
price plunge, based on a local projections model estimated for 155 EMDEs, of which 36 are energy
put in place in major economies. The
exporters (oil, gas, or coal), for 1970-2018 (Annex 4.3). Numbers on the horizontal axes indicate
years since the oil price plunge, which occurs at t=0. Oil price plunges of more than 30 percent over
disappointing short-term growth trajectory
seven months occurred in 1985-86 (supply-driven), 1990-91 (demand-driven), 1998 (demand-driven), reflected several factors.
2001 (demand-driven), 2008-09 (demand-driven), and 2014-16 (supply-driven).
E.F. Output declines in the year following the oil price plunge. High (low) debt is government debt
above (below) 30 percent of GDP for upper-middle and lower-middle income economies and 70
percent of GDP for high-income economies. Fixed exchange rates are as defined in IMF’s Annual
12 In demand-driven plunges, similar patterns emerged but
Report on Exchange Arrangements and Restrictions.
Click here to download data and charts. differences were less pronounced and there was wide heterogeneity
between countries.
Output and investment slump in energy FIGURE 4.6 Impact of 2014-16 oil price plunge on energy
exporters. The impact of the oil price plunge of exporters
2014-16 on commodity exporters was severe. The oil price plunge of 2014-16 forced many energy exporters into
Growth slowed in more than 70 percent of procyclical fiscal and monetary tightening. Market intervention to support
currencies caused a substantial decline in foreign exchange reserves.
energy-exporting EMDEs in 2015 and 2016, with Those with more flexible exchange rates and greater export diversification
many facing declining consumption and had milder output losses.
investment (Figure 4.6). Since energy-exporting
countries are generally less diversified than other A. Cumulative output increase for B. Share of energy-exporting EMDEs
commodity exporters, they are particularly energy-exporting EMDEs, 2014-16 with increasing/decreasing growth
vulnerable to oil price declines (Aslam et al. 2016).
• Fiscal policy tightening in energy exporters.

Many EMDE energy exporters, relying heavily
on hydrocarbon revenues, were forced to
tighten fiscal policies to realign spending with
revenues, despite rising economic slack and
diminishing long-term growth prospects.13
Some were able to at least partially mitigate
exchange rate and fiscal pressures by drawing C. Foreign exchange reserves and D. Change in fiscal balance in energy
on sovereign wealth funds (World Bank nominal effective exchange rate exporters, 2014-16
appreciation of energy exporters,
2015a). 2014-16
• Monetary policy tightening in energy exporters.

Fiscal policy tightening was often
compounded by monetary policy tightening,
and exchange rate market intervention to
support currencies or currency pegs. As
foreign reserves eroded, several countries
eventually adopted more flexible exchange rate
regimes as part of the adjustment to low oil
prices. A small number of countries with Source: Bank for International Settlements; Haver Analytics; International Monetary Fund; United
Nations Conference on Trade and Development (UNCTAD); World Bank.
severe liquidity pressures resorted to A.C.D. Unweighted averages. Whiskers indicate minimum-maximum ranges.
A. “Above average concentration” and “below average concentration” groups are defined by countries
unconventional measures (Sommer et al. above or below the sample average for export concentration in 2016. Concentration index measures
2016). the degree of product concentration, where values closer to 1 indicate a country’s exports are highly
concentrated on a few products. The average for the sample is 0.6, where 1 is the most concentrated.
Exchange rate classification is based on the IMF’s Annual Report on Exchange Arrangements and
Exchange Restrictions database, in which countries are ranked 0 (no separate legal tender) to 10
Adverse spillovers from the slowdown in energy (free float). “Pegged” refers to countries with either a hard or soft peg, which is denoted by a ranking
exporters. Headwinds in Russia and the Gulf of 1 to 6, while “floating” denotes those with rankings of 7 to 10 and includes countries with horizontal
bands and other managed arrangements. Sample includes 34 (exchange rate) or 34 (concentration)
Cooperation Council (GCC) economies reduced energy-exporting EMDEs.
B. Aggregate growth rates calculated using GDP weights at 2010 prices and market exchange rates.
within-region flows of trade, remittances, foreign Increasing/decreasing growth are changes of at least 0.1 percentage point from the previous year.
Countries with a slower pace of contraction from one year to the next are included in the increasing
direct investment, and official grants (World Bank growth category.
2015a, 2016c). Energy-exporting low-income C. Nominal effective exchange rate and foreign reserve levels indexed to 100 in January 2014.
Change in official reserve assets from 2014 to 2016. Last observation is December 2016.
countries (Chad, South Sudan) were hit D. Sample includes 28 oil-exporting EMDEs (excludes Albania, Brunei Darussalam, Ghana, Libya,
Myanmar, South Sudan, and Turkmenistan). Change in overall fiscal balance is measured from 2014-
particularly hard, as the effect of the oil price 16. “Above average” and “below average” oil revenue groups are defined by countries above or below
the sample average of oil revenues as a share of GDP based on 2014 data.
shock was exacerbated by conflict and Click here to download data and charts.
deteriorating security conditions.
13 See Danforth, Medas, and Salins (2016) and World Bank
(2016a, 2016b, 2017a). The effects of the price shock were also
exacerbated by idiosyncratic factors, including sanctions on Russia
and conflict and geopolitical tensions in the Middle East and North
Africa region.
FIGURE 4.7 Impact of 2014-16 oil price plunge on the 2014; Caldara, Cavallo, and Iacoviello 2019).
largest energy importers This reflects less oil-intensive energy mixes,
The oil price plunge of 2014-16 provided limited boost to activity in China, less energy-intensive consumption, and energy
which tends to use more coal than oil for energy generation. In the United price controls that limit the pass-through of
States, the shale oil industry slowed sharply. world prices to domestic retail prices. In
addition, many countries seized the
A. Consumption of fuels, 2018 B. Contribution of mining investment
to U.S. GDP growth and U.S. industrial opportunity to lower energy subsidies (Box
production growth 4.1). While this improved fiscal and external
positions, it dampened the benefit to activity
in energy-importing EMDEs.
• Policy tightening in energy-importing EMDEs.

A number of non-oil commodity exporters
and commodity importers raised monetary
policy rates during 2015–16 to stem currency
depreciation. Others reacted to above-target
Source: BP Statistical Review; Federal Reserve Bank of St. Louis; U.S. Bureau of Economic
inflation. In some cases, fiscal deteriorations
Analysis; World Bank. amid slow growth reduced government
A. Oil consumption is measured in million tonnes; other fuels in million tonnes of oil equivalent.
Renewables are based on gross generation from renewable sources including wind, geothermal, revenues and required spending cuts.
solar, biomass, and waste, but not accounting for cross-border electricity supply.
B. Mining investment is real private fixed investment of nonresidential structures for mining
exploration, shafts, and wells. • Investment in the United States. In the United
States, the boost to private consumption from
lower oil prices was partly offset in the short
run by a sharper-than-expected contraction in
• Stalled recovery in energy-importing EMDEs capital spending in the energy sector
and advanced economies. Growth also slowed (Baumeister and Kilian 2016a). This
in most energy-importing economies in investment is highly price elastic (Bjørnland,
2015-16 (Figure 4.7). Nordvik, and Rohrer 2017; Cakir Melek
2018; Newell and Prest 2019): mining
• China’s energy mix and rebalancing needs. investment halved in the two years that
China is the second-largest oil importer in the followed the mid-2014 oil price plunge,
world, but the share of oil in its overall energy lowering growth by 0.2 percentage point in
consumption is the lowest among G20 both 2015 and 2016.
economies. Regulated fuel costs and a low
energy and transportation weight in consumer The 2020 oil price plunge
baskets limit real income gains for consumers
from lower oil prices (World Bank 2015a). Low oil prices are likely to provide, at best,
The oil price plunge also coincided with a temporary initial support to growth once
policy-guided near halving of investment restrictions to economic activity are lifted and
growth, which tends to be resource-intensive, until excess inventories are unwound. In the very
to ease growth to a more sustainable level.14 short term, restrictions to stem the pandemic are
likely to close off the main channel for low oil
• Lower sensitivity of other energy-importing prices to benefit growth, by limiting transport and
EMDEs to oil shocks. Activity in energy- other energy-intensive activities. However, even
importing EMDEs is less responsive to oil once these restrictions are lifted and energy
price shocks than that in major advanced demand recovers, the current demand-driven oil
economies (Aastveit, Bjørnland, and Thorsrud price plunge is likely to be associated with deep
and lasting output losses. More than in previous
demand-driven oil price plunges, the adverse
14 See Huidrom, Kose, and Ohnsorge (2017); Kang and Liao impacts on energy exporters—regardless of
(2016); and World Bank (2016a). whether they are advanced economies or
BOX 4.1 Reforms after the 2014-16 oil price plunge

The 2014-16 oil price plunge triggered significant reforms. In energy exporters, the main focus was on encouraging diversification
and putting public finances on a sounder footing. Both energy exporters and importers cut energy subsidies. Current low oil prices
may provide a window of opportunity to put in place mechanisms that permanently eliminate energy subsidies.
The 2014-16 oil price plunge forced many energy Saudi Arabia’s fiscal non-oil revenues improved from 7.7
exporters into procyclical fiscal tightening that deepened percent of GDP in 2016 to 10 percent of GDP in 2019.
their downturns. Many energy exporters recognized an Nigeria identified several sectors to promote greater
urgent need to render both their economies and their diversification of export earnings and government revenues
public finances more resilient, and embarked on reforms (Nigeria Ministry of Budget and National Planning 2017).
to encourage diversification, strengthen non-oil revenues, Kazakhstan’s “100 Concrete Steps” program, adopted in
and cut poorly targeted subsidies (Stocker et al. 2018; 2015, aimed to diversify the economy and improve
Figure 4.1.1). Energy-importing EMDEs also seized the competitiveness and transparency. By the start of 2020,
opportunity of low oil prices to cut energy subsidies. This Kazakhstan has completed more than half of these 100
box examines these reforms in greater detail, answering the steps, including efforts to improve governance. However,
following two questions: efforts to boost industrialization have encountered
challenges, while plans to increase private land ownership
• Which reforms did EMDE energy exporters embark have been delayed.
on?
Efforts to encourage diversification have continued and
• Which reforms did EMDE energy importers embark include: reducing labor market rigidities (for example,
on? Saudi Arabia, Oman, Qatar), supporting foreign and
private investment (for example, Saudi Arabia), expanding
Reforms in energy exporters infrastructure investment (for example, Malaysia),
improving the business environment (for example, Algeria,
Energy exporters initiated economic diversification Brunei Darussalam, the GCC countries, Kazakhstan,
programs, energy subsidy reforms, and measures to Nigeria, Russia), expanding deeper trade integration
strengthen non-energy government revenues. within the Eurasian Economic Union (for example,
Russia), and strategic investment plans in renewables
Diversification programs. Before the current plunge in oil energy (Azerbaijan, the GCC countries). However, in
prices, hydrocarbon sector activity represented more than some cases, the structural reform agenda has faced
one-third of GDP in a number of countries in Central legislative or implementation delays (for example, Algeria,
Asia, Sub-Saharan Africa, and, in particular, the Middle Kazakhstan).
East. Oil production represented the majority of
government revenue and exports in most energy-exporting Energy subsidy reform. The sharp reduction in
EMDEs in 2013. This suggests an untapped potential for government revenues among energy-exporting EMDEs led
greater diversification of exports and government revenues, to an increased emphasis on reducing energy subsidies to
which would bolster long-term growth prospects and restore fiscal space, discourage wasteful energy
improve these economies’ resilience to external shocks consumption, and reallocate spending to programs that
(Hesse 2008; IMF 2016; Lederman and Maloney 2007). better target the poor (IMF 2017b). Between mid-2014
and end-2016, more than half of energy-exporting
Following the 2014-16 oil price collapse, several large EMDEs reformed energy subsidies, including countries in
energy-exporting EMDEs laid out medium- to long-term the Middle East and North Africa, Sub-Saharan Africa,
plans to reduce their reliance on the energy sector. As part East Asia, Latin America, and Central Asia.1 A number of
of Saudi Arabia’s 2016 Vision 2030 plan, the National energy exporters have also reduced utility subsidies
Transformation Program targeted an increase in non-oil
commodity exports and non-oil government revenues
(Kingdom of Saudi Arabia 2016; World Bank 2016c). 1 Energy subsidies were reformed between mid-2014 and late 2017 in
Algeria, Bahrain, Cameroon, Ecuador, Gabon, Ghana, the Islamic

Republic of Iran, Iraq, Kazakhstan, Kuwait, Malaysia, Nigeria, Oman,
Note: This box was prepared by Collette Mari Wheeler, with Qatar, Saudi Arabia, Sudan, Trinidad and Tobago, Turkmenistan, the
research assistance from Kaltrina Temaj. United Arab Emirates, and Yemen. Reforms in Angola, Indonesia, and
Nigeria, were, however, not sustained once oil prices rose.
BOX 4.1 Reforms after the 2014-16 oil price plunge (continued)
although, during the COVID-19 pandemic, subsidies were Egypt, Mexico).2 In response to the COVID-19
raised again in some countries (for example, Gabon, pandemic, some governments have provided fuel price
Indonesia, Oman, Saudi Arabia, United Arab Emirates). discounts to some sectors (for example, Egypt) or increased
subsidies to vulnerable households (for example,
In some cases, subsidy reform was a significant break from Guatemala, Montenegro, Ukraine).
past policy (Krane and Hung 2016; World Bank 2017b).
Encouragingly, the design and implementation of recent Other reforms. Other reforms have aimed to raise
energy subsidy reforms have been superior to past efforts, revenues, with some countries increasing taxes on energy
which were poorly phased and hampered by insufficient or energy-dependent sectors such as transportation (for
communication to the public about the rationale for example, Bangladesh, China, Egypt, Mozambique,
reform (Asamoah, Hanedar, and Shang 2017; Clements et Rwanda, South Africa, Vietnam; IEA 2015; IMF 2016;
al. 2013). In many cases, recent reforms have also helpfully Kojima 2016). These steps also included measures to avoid
included measures to mitigate the impact on the poor and energy subsidies reemerging if oil prices rebound—
to strengthen social safety nets (for example, Algeria, automatic pricing mechanisms or full energy price
Angola, Saudi Arabia). More recently, Nigeria announced liberalization have been common (for example, China,
plans to eliminate energy subsidies. However, revenue- Côte d’Ivoire, India, Jordan, Madagascar, Mozambique,
enhancing energy price reforms have remained absent in Mexico, Thailand, Ukraine; Asamoah, Hanedar, and
some countries (for example, Cameroon). Shang 2017; Beylis and Cunha 2017).3
Fiscal reforms. Several countries have implemented tax
reforms to compensate for the loss of government revenues
Conclusion
and to insulate themselves from future oil price
Remaining challenges. Some of these policies have yet to
fluctuations (World Bank 2018c). This has included the
bear fruit. Notwithstanding fiscal and energy subsidy
introduction of taxes on goods and services or value-added
reforms in energy exporters, fiscal break-even prices—the
taxes (for example, Bahrain, Malaysia, Saudi Arabia, the
oil prices at which government budgets are balanced—in
United Arab Emirates), as well as raising existing VAT or
almost all energy-exporting EMDEs exceed current prices,
excise tax rates (Bahrain, Colombia, Oman, Saudi Arabia,
often by considerable margins. Energy subsidies still
United Arab Emirates). Russia has implemented a fiscal
represented an average of 4 percent of GDP as of 2018
rule that targets a primary deficit of 0.5 percent of GDP at
among energy-exporting EMDEs, many of which
the benchmark oil price of $40 per barrel (in 2017 U.S.
implemented reforms 2014-16 (Figure 4.1.1). In 2019,
dollars). Any excess fiscal resources that are generated from
the share of commodity exports in total goods exports
higher oil prices are saved in the National Welfare Fund.
remained as high now as in 2013, before the last oil price
The assets from this fund have already helped Russia
plunge. The recent oil price plunge may provide further
support its economy and extend benefits to vulnerable
momentum to proceed with planned reforms and deepen
households during the recent pandemic. However
them once the immediate health crisis subsides. Energy
implementation of fiscal reforms has stalled in some cases
importers, in contrast, should take advantage of lower
(for example, Kuwait, Oman, Qatar), while exemptions
energy prices to lower subsidies—which averaged over 2.5
have limited revenue growth in some others (Malaysia).
percent of GDP in 2018—and utilize these resources to
finance urgent health care needs. In energy exporters and
Reforms in energy importers
importers alike, there is an opportunity to put in place
Energy subsidy reform. Like energy-exporting EMDEs, reforms now that are non-binding in the short term but
energy-importing EMDEs took advantage of declining oil address long-standing inefficiencies and fiscal costs in the
prices to begin dismantling energy subsidies, which tend to long term.
disproportionately benefit those with higher incomes. In
addition, they can crowd out public investment and
encourage more intensive use of fossil fuels (Arze del
2 Mexico has a diversified export base and, hence, is classified as an
Granado, Coady, and Gillingham 2012). Several countries
energy importer.
have implemented such reforms in response to the 2014- 3 In Mozambique, the elimination of fuel subsidies, the introduction
16 oil price plunge (for example, China, the Arab Republic of an automatic fuel price adjustment, and increased tariffs on electricity
of Egypt, Mexico, Morocco, Tunisia), but slippages in and public transportation, contributed to the 2 percentage points of GDP
implementation have occurred in some cases (for example, narrowing of the primary fiscal balance between 2016 and 2018.
FIGURE 4.1.1 Reforms since 2014

Energy exporters have implemented reforms to strengthen business climates and reduce energy subsides, but current oil
prices remain below fiscal and external break-even prices in most energy exporters.
A. Number of reforms in energy exporters B. Energy subsidies C. Fiscal and external breakeven prices
for selected energy exporters, 2020
Sources: International Energy Agency; International Monetary Fund; World Bank Doing Business.
A. Sample includes 35 energy-exporting EMDEs.
B. Sample includes 25 energy-exporting EMDEs and 14 energy-importing EMDEs.
C. Breakeven prices refer to the oil price at which either the fiscal balance or the current account balance is zero in 2020. Dashed line indicates the average of daily Brent
oil prices from May 1, 2020, to May 20, 2020.
Fiscal space generated by subsidy reforms. Replacing • Entrenching reform. Reforms formally embedded in
energy subsidies with expanded and better-targeted social legislation may be more likely to be enforced and
safety nets, coupled with structural reforms, can improve sustained once oil prices rise again.
fiscal positions while supporting low-income households.4
Policies to reduce subsidies can help promote growth • Transparency. Reforms are more likely to be sustained
because fiscal savings generated by lower subsidies can if price setting can be de-politicized (Inchauste and
fund productivity-enhancing education and infrastructure. Victor 2017). This can be achieved with a transparent
For example, in Egypt, fiscal savings from the energy formula for setting energy prices.
subsidy reforms were redirected towards social spending
(ESMAP 2017b). These policies can also foster low-carbon • Frequent price adjustments. A formula with more
transition and promote green energy (Monasterolo and frequent price adjustments can help avoid larger and
Raberto 2019; Mundaca 2017). For energy-exporting more disruptive price changes, especially once oil
EMDEs, eliminating costly energy subsidies could help prices return to more normal levels.
offset the collapse in revenue from oil extraction given that
oil prices are well below their fiscal breakeven points. • Tax design for price stability. A transparent formula for
frequent price adjustments can be accompanied by
Increasing the chances of success of subsidy reform. combination of fixed and variable taxes that can
Energy subsidy reform raises formidable political-economy smooth price volatility, such as in the case of Chile.
challenges (Inchauste and Victor 2017). The different
prongs of reforms, however, need to be carefully sequenced • Supporting reforms. Subsidy cuts that are accompanied
and communicated to avoid delays, social unrest or by cuts in the cost of other household public services,
reversals, as has been the experience in some client such as school or public transport fees, or increases in
countries (for example, Ecuador; Worley, Pasquier, and other social benefits can help build public support for
Canpolat 2018). Reforms may prove more lasting if a few reform. In India, for example, the removal of price
principles are observed in their implementation. controls was accompanied by targeted cash transfers
and in Brazil by targeted assistance to low-income
households for energy conservation (Deichmann and
4 For details, see Coady et al. (2017, 2019); Guénette (2020); Stocker
Zhang 2013). Such supporting reforms need to be
et al. (2018); and World Bank (2014, 2015a, 2015b). accompanied by improved capacity to implement
benefit programs (Inchauste and Victor 2017).
• Public awareness. Awareness campaign can highlight competition and the potential for new entrants signifi-
the benefits of subsidy reforms, in terms of giving cantly lowered their markups.
greater room for higher-priority spending, and thus
raise public support for reform (El-Katiri and Fattouh Energy pricing reform. Even in EMDEs where energy
2017). subsidies have been eliminated, the current low oil prices
provide an opportunity to introduce carbon pricing and
Role of competition, legal and regulatory frameworks. other energy taxation that will discourage inefficient
Improving the macroeconomic framework and competi- consumption as global oil prices rise again. As a cost-
tive environment can be more effective in improving the effective instrument for meeting climate targets, 57
financial positions of both consumers and producers than initiatives (including 28 emission trading systems) were
energy subsidies. Carefully designed and properly enforced implemented at the national and subnational level in
antitrust laws and consumer protection legislation are 2019, covering about 20 percent of global green-house gas
essential components of institutional frameworks that emissions (World Bank 2019a). Existing carbon pricing is
support market mechanisms. A sound legal and regulatory considered insufficient to meet climate targets, so
framework favoring competitive markets provides a more policymakers should seize the current opportunity of
effective response to many of the problems that subsidies exceptionally low energy prices to put in place pricing
attempt to address. For example, the removal of price formulas now that encourage more energy-efficient growth
controls and barriers to entry in the transportation sector once the recovery gathers momentum (World Bank
significantly increased competition and lowered trans- 2019a). Finally, support measures for energy-intensive
portation costs in Rwanda (Teravaninthorn and Raballand industries during the current pandemic could be made
2009). Even in the case where incumbent firms contingent on improvements in fuel efficiency.
maintained outsized market shares, the presence of
EMDEs—may outweigh benefits to activity in Coincidence with other shocks. The public health
energy importers.15 Adverse effects are likely to be crisis, unprecedented capital outflows from
compounded by new headwinds, including EMDEs, and a collapse in global trade and tour-
elevated macro-financial vulnerabilities that were ism have put financial and economic pressures on
less relevant in previous oil price plunges, or even energy exporters and importers alike (Figure 4.8).
a second wave of infections. That said, there might
be a short window early in the recovery when still- • Public health crisis. The number of confirmed
high inventories depress prices and support infections has soared in energy-exporting
activity. EMDEs, as well as energy-importing EMDEs,
and the effect of the sharp loss in consumer
Implications of the demand-driven nature of oil and investor confidence may linger long after
price plunge. In contrast to the oil price plunge of the pandemic has subsided.
2014-16, the 2020 episode has been mainly driven
by a collapse in energy demand resulting from • Trade collapse. Global manufacturing activity,
restrictions to stem the spread of the pandemic tourism, and trade have plunged amid
and the global recession (Figure 4.1). Once the closures of non-essential services, shops,
global recovery is underway, and excess inventories factories, and public spaces; stay-at-home
are unwound, oil prices would be expected to orders travel restrictions; and a high degree of
increase again in tandem with global growth. risk aversion of consumers (Chapter 1).
• Tightening financial conditions. Flight to safety

15 The 2014-16 oil price plunge is a reminder that this will also
has resulted in a sharp tightening of financial
be a challenge, although to a lesser extent, in energy importing conditions in EMDEs (Chapter 1). Global
economies with sizable energy sectors. equity markets have fallen sharply, with
extreme volatility. EMDE currencies have FIGURE 4.8 Pandemic and mitigation measures in EMDE
weakened substantially against the U.S. dollar energy exporters
despite foreign exchange market interventions The pandemic is spreading in energy-exporting and energy-importing
by central banks. Yield spreads on EMDE EMDEs. In response, governments have imposed restrictions that curtail
bond issues have risen steeply. economic activity. The impact on informal activity may be particularly
adverse.
Obstacles to policy effectiveness in EMDEs.

A. Number of reported infections in B. Number of COVID-19-related
Many central banks and governments have EMDEs fatalities in EMDEs
engaged in large-scale monetary and fiscal stimulus
to support their economies amid the pandemic
(Chapter 1). However, these may not reach the
most vulnerable groups. This is of particular
concern for economies with widespread
informality. Large sections of their population do
not have bank accounts, which would usually
provide a means for delivering direct cash support
quickly. By the same token, many people are
outside the formal social benefit and tax system, C. Stringency of mitigation measures D. Share of informal economy in
EMDEs
and would not benefit from tax deferments and
cuts, or from higher regular social benefits
(Chapter 3).
Macro-financial vulnerabilities in energy

exporters. During the oil price plunge of 2014-16,
energy exporters with highly concentrated export
and revenues bases, weak fiscal positions, and fixed
exchange rates witnessed considerably steeper
growth slowdowns. In today’s context, these Source: European Centre for Disease Prevention and Control (ECDC); OurWorldInData.org; Oxford
effects are likely to be more pronounced since COVID-19 Government Response Tracker; World Bank.
A.B. Daily data. Last observation May 21, 2020.
there has been limited progress in export C. The Oxford COVID-19 Government Response Tracker collects publicly available information on 11
indicators of government response including school closures, public events cancellations, and public
diversification, and fiscal positions are weaker than information campaigns, as well as fiscal and monetary measures and emergency investment in health
care. The index ranges between 0 and 100 where higher indicates more stringent measures.
they were before the 2014-16 oil price plunge. Aggregate growth rates calculated using GDP weight at 2010 prices and market exchange rates. To
correct for data gaps, data is extended with the most recent observation. Sample includes 121
EMDEs, of which 33 are energy exporters.
In 2014-16, growth in energy exporters with a D. 2016 data used for share of GDP; 2014 data used for share of employment.
higher degree of economic diversification (for Click here to download data and charts.
example, Bahrain, Ghana, Malaysia, Qatar), and a

floating exchange rate regime (for example, EMDEs that lacked the necessary buffers (Husain
Albania, Russia), recovered more quickly from the et al. 2015; World Bank 2015b). Energy-
fall in oil prices than in those with low exporting EMDEs with higher reliance on oil-
diversification and fixed exchange rates. Fiscal related revenues faced a more pronounced
balances also fared better in energy-exporting deterioration in fiscal balances than in those
EMDEs with more flexible exchange rate regimes, economies that managed to diversify government
in part because real exchange rate depreciation revenue away from oil before 2014.
mitigated revenue declines and spurred needed
adjustment within the private sector. Growth Energy exporters remain highly reliant on
remained stronger in energy exporters with larger commodity exports and have more precarious
foreign reserves and low historical inflation fiscal positions (Figure 4.9). In 2019, the energy
volatility (Grigoli, Herman, and Swiston 2017; sector continued to account for 12 percent of
World Bank 2016a). The need for fiscal government revenues in the average energy-
adjustment was greater in energy-exporting exporting EMDE. Government debt in energy-
FIGURE 4.9 EMDE energy exporters’ vulnerabilities: exporting EMDEs had risen to 50 percent of GDP
2014-16 and 2019 in 2019 from 27 percent of GDP in 2013, and the
Today’s energy-exporting EMDEs are typically no less reliant on energy fiscal balance has turned from near-balance in
exports than in 2013, and have more precarious fiscal positions. 2013 to a deficit of 2.7 percent of GDP in 2019
(IMF 2017a; World Bank 2017a). As a result,
A. Resource sector activity in
energy-exporting EMDEs
B. Export concentration
even after the public health crisis subsides, the
need to shore up public finances is likely to weigh
on their recovery.
Conclusions
The the restrictions imposed to stem the
pandemic and the global recession triggered by the
outbreak of the COVID-19 pandemic have been
accompanied by an unprecedented collapse in oil
C. Share of energy revenues in D. Commodity export share of energy
demand and prices. Unfortunately, the price
government revenues of exporters decline is unlikely to provide much of an
energy-exporting EMDEs
immediate buffer for global growth, because of the
impact of mitigation measures that are
constraining energy-intensive activities and
because energy-exporting EMDEs have less fiscal
and monetary policy room to counter the impact
on their economies. That said, there might be a
short window early in a recovery when still-high
inventories depress prices and support activity.
Currently, responding to the health emergency

E. Government and corporate debt of F. Fiscal balance of energy exporters and its impact on economic activity remains the
energy exporters
immediate priority. In both energy exporters and
importers, support measures could focus on
boosting health infrastructure and capacity, in
addition to protecting employment and social
safety nets. To alleviate the burden on fiscal
balance sheets, energy exporters and importers
with high debt levels may want to preemptively
identify priority expenditures that need to be
safeguarded if financing shrinks, as well as lower-
Sources: Haver Analytics; International Monetary Fund; United Nations Conference on Trade and
Development (UNCTAD); World Bank.
priority, poorly targeted, or inefficient spending
A.C. EAP=East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the programs that can be delayed or suspended.
Caribbean, MNA = Middle East and North Africa, and SSA = Sub-Saharan Africa.
A. Regional aggregates are medians. Sample includes 34 energy-exporting EMDEs. Chart shows Additional liquidity could be injected in
resource rents in percent of GDP.
B. Orange diamonds denote the median and blue bars represent the interquartile range of individual
economies with low and stable inflation to enable
country groups. Sample includes 33 energy-exporting EMDEs (excludes South Sudan), 118 energy-
importing EMDEs, and 35 advanced economies. Concentration index measures the degree of
banks to extend credit to firms and households,
product concentration, where values closer to 1 indicate a country’s exports are highly concentrated and to prevent widespread insolvency.
on a few products.
C. Regional aggregates are medians. Sample includes 24 energy-exporting EMDEs (Algeria, Angola,
Azerbaijan, Bahrain, Bolivia, Cameroon, Chad, Colombia, Republic of Congo, Ecuador, Equatorial The economic damage of the pandemic could be
Guinea, Gabon, Iran, Iraq, Kazakhstan, Kuwait, Nigeria, Oman, Qatar, Russia, Saudi Arabia, Sudan,
Trinidad and Tobago, and the United Arab Emirates). long lasting, as it will take considerable time to
D. Blue bars show share of commodities in total goods exports. Orange whiskers show the minimum-
maximum range. repair the disruptions to labor markets, value
E.F. Blue bars show unweighted averages. Orange whiskers show the interquartile range.
chains, and balance sheets, and to restore
consumers’ confidence in the safety of retail,
leisure, and work spaces (Chapter 3). Economic
and financial weaknesses in energy exporters are • Elasticity restrictions. Restrictions are imposed
especially likely to pose difficulties. This highlights on the short-run price elasticity of oil
the importance of ensuring that necessary fiscal demand. The impact price elasticity of
support during the pandemic be accompanied by demand is assumed to be non-positive; the
credible commitments to restore fiscal median draw in the range -0.2 to -0.1 is used,
sustainability once it subsides. For the energy in line with estimates of the elasticity since the
exporters, this will require pressing ahead with the 1980s in Baumeister and Peersman (2013).
reform programs that many launched after the
price plunge of 2014-16 (Box 4.1). Some energy- Data. The data set uses monthly data from
exporting EMDEs have successfully diversified January 1980 to April 2020. Global industrial
their economies after implementing measures to production is the production-weighted average of
stimulate non-energy exports, as part of a broad industrial production in 31 advanced economies
program of reforms to improve the business and 47 EMDEs (unbalanced sample depending on
environment, education, and skills acquisition (for availability). Data for industrial production in
example, Malaysia, Mexico; Callen et al. 2014). April is estimated as the level predicted by the
For the energy-importing EMDEs, the plunge in global manufacturing purchasing managers’ index.
oil prices is an opportunity to revisit energy Global oil production is from the International
pricing and make lasting fiscal room for higher- Energy Agency (IEA) from 1987-2020 and the
priority spending to reignite long-term growth U.S. Energy Information Administration (EIA)
prospects (Chapter 3). from 1980-86. Oil prices are the unweighted
average of Brent, West Texas Intermediate, and
Dubai crude oil prices from the World Bank’s
Pink Sheet (measured in U.S. dollars). OECD
inventories use IEA data from 1991-2020 and EIA
ANNEX 4.1 Methodology: data from 1987-1990. In April 2020 and prior to
1987, percent changes in U.S. inventories are used
Decomposition of oil price as a proxy for changes in OECD inventories (U.S.
movements stocks account for around one-third of total
OECD inventories).
Methodology. A structural vector autoregression
(SVAR) as in Kilian and Murphy (2014) is used to
model global oil prices. The SVAR includes the
logarithms of global oil production, global oil
ANNEX 4.2 Oil price
prices, global industrial production, and OECD plunges since 1970
inventories. Three shocks are identified using a
combination of sign restrictions on impact Until 2020, there had been six previous oil price
responses and on the impact price elasticity of oil plunges since 1970 when oil prices fell by 30
demand. percent or more over a six-month period.
• Sign restrictions. A negative demand shock is 1985-86. The 1985-86 oil price slump arose from
identified as a shock that lowers oil prices a supply shock as OPEC reverted to its production
while lowering global industrial production target of 30 mb/d in response to rising oil supply
and global oil production. A positive supply from the North Sea and Mexico and breaches of
shock is identified as a shock that lowers oil OPEC production agreements (Gately, Adelman,
prices while raising oil production and and Griffin 1986). The oil price plunge ushered in
industrial production. A positive speculative a period of weak growth and significant debt
demand shock (the residual in Figure 4.2.F) is problems in some large EMDEs as well as slow
identified as one that raises oil inventories, growth in European countries, and, at the end of
increases prices and oil production, and 1987, a significant downward correction in U.S.
reduces industrial production. and global stock markets
200 CHAPTER 4 GLOBAL ECONOMIC PROSPECTS I JUNE 2020
1990-91. While the oil price decline of 1990-91 and Kilian 20166; World Bank 2018a). Supply
satisfy the definition employed here, it differed factors accounted for about two-thirds of the oil
from other oil price plunges in being a reversal of price decline (Figure 4.2; Baffes et al. 20156). 1 It
a previous oil price spike triggered by the first was accompanied by a period of slowing global
Gulf War. Despite monetary policy loosening, potential growth (World Bank 2018c, 20196).
global growth slowed in 1992 before recovering
modestly in 1993, as a recession in Europe ran its
course, the recovery in the United States remained
hesitant amid financial strains in the savings and
loans sector, and Japan entered a period of ANNEX 4.3 Methodology:
prolonged stagnation.
Impact of oil price plunges
1998. The 1997 Asian financial crisis, set against a on output
backdrop of a continued expansion of OPEC
production until mid-1998, was accompanied by Methodology. The responses of real output,
weakening oil demand and a sharp decline in oil investment, consumption, and productivity
prices (Fattouh 2007). Despite low oil prices, the growth-denoted by yt-following oil price
global recovery remained tepid for most of 1998, collapses are estimated using the local projections
partly as a result of the failure of a large asset model ofJorda (2005). The model is given by
management fund in the United States and
financial stress in major emerging markets.
yt + h , j = α( h ), j + β( h )  t , j +  sp=1 lq=1 γ( h ) X tl− s , j
2001. The disruptions and uncertainty caused by +  sp=1 δ( h ), s yt − s , j + u ( h )t , j
the September 11 terrorist attacks in the United
States intensified a growth slowdown already where h = 0, …, 5 is the forecast horizon, α(h),j is
underway as the "dotcom" bubble deflated. country j fixed effects, and u(h)t,j is an error term.
Sofrening global activiry and rising uncertainty The coefficient of interest β(h) captures the
triggered a sharp decline in oil prices. However, dynamic multiplier effect (impulse response) of
aggressive monetary policy easing by the Federal the dependent variable with respect to the event
Reserve and other major central banks supported a l
dummy variable Et,j X t , j represents a set of control
rapid rebound in activiry.
variables with coefficients y(h) . The specification
2008-09. A severe recession following the global controls for lagged dependent variables yt-s,j . The
financial cns1s sent all commodity prices number of lags for each variable is denoted by p
tumbling. The recovery from the global recession and varies from 1 to 3 for the estimation. While
was sluggish as many countries faced a wide the supply shock is represented by a univariate
variety of legacy challenges and global potential model, the demand shock controls for lagged
growth slowed (Kilic, Kose, and Ohnsorge 2020; output and investment as critical macroeconomic
Kose and Ohnsorge 2019). However, starting in determinants. Driscoll and Kraay (1998) standard
2009, strong demand for oil and other errors are used to address cross-sectional and serial
commodities from China propelled a rebound in correlation. The model is estimated separately for
their prices. all EMDEs, for energy-exporting EMDEs, and for
other EMDEs, and for subgroups of EMDEs with
2014-16. Between mid-2014 and early 2015, oil fixed and floating exchange rates and with high
prices fell by more than 50 percent and then and low government debt.
continued to fall until their trough in early 2016.
The decline was triggered by a combination of Definitions. Oil price collapses are defined as
surging U.S. shale oil production, receding years in which oil prices fell by 30 percent or more
geopolitical risks involving some key producers,
shifts in policies by OPEC, and weakening global
1 Other estimates put the share of supply factors at just under half
growth prospects (Baffes et al. 2015; Baumeister (Baumeister and Hamilton 2019).
over a six-month period: 1985-86, 1991, 1998, Baffes, J., A. Kabundi, and P. Nagle. 2020. “The Role
2001, 2008-09, 2014-16. Largely supply-driven of Income and Substitution in Commodity Demand.”
collapses occurred in 1985-86 and 2014-16 when Policy Research Working Paper 8495, World Bank,
OPEC abandoned production agreements in favor Washington, DC.
of raising market share; the other oil price Baffes, J., M. A. Kose, F. Ohnsorge, and M. Stocker.
collapses were largely demand-driven as recessions 2015. “The Great Plunge in Oil Prices: Causes,
lowered energy demand (Baffes et al. 2015). Consequences, and Policy Responses.” Policy Research
Note 1, World Bank, Washington, DC.
Data. Using annual data, the sample includes 155
EMDEs for 1970-2018. This includes 36 EMDEs Baumeister, C., and J. D. Hamilton. 2019. “Structural
that are energy exporting (oil, gas, or coal), Interpretation of Vector Autoregressions with
defined as in Table 1.2 (Chapter 1) and 120 other Incomplete Identification: Revisiting the Role of Oil
Supply and Demand Shocks.” American Economic
EMDEs. Data on output, investment, consump-
Review 109 (5): 1873-1910.
tion, and productivity are available from the
World Bank’ World Development Indicators. The Baumeister, C. and L. Kilian. 2016a. “Lower Oil Prices
exchange rate classification follows the IMF’s and the U.S. Economy: Is This Time Different?”
Annual Report on Exchange Arrangements and Brookings Papers on Economic Activity (Fall): 287-336.
Restrictions. High (low) public debt is above
———. 2016b. “Understanding the Decline in the
(below) 70 percent of GDP for high-income
Price of Oil Since June 2014.” Journal of the Association
EMDEs and 30 percent of GDP for upper-
of Environmental and Resource Economists 3 (1): 131-
middle-income, lower-middle-income, and low- 158.
income EMDEs.
Baumeister, C., and G. Peersman. 2013. “The Role of
Time-Varying Price Elasticities in Accounting for
Volatility Changes in the Crude Oil Market.” Journal of
Applied Econometrics 28 (7): 1087-1109.
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Adding Fuel To The Fire: Cheap Oil During The Pandemic

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CHAPTER 4

Adding Fuel to the Fire:

Introduction By one measure, the European Brent spot price,

research assistance from Kaltrina Temaj. traded at negative prices.

• What has been the source of the 2020 oil

• How does it compare with earlier episodes?

• How will low oil prices likely affect the

• The steepest drop on record. The collapse in oil

Demand decline resulting from the economic

Supply fluctuations. Oil markets have also been

output and industrial production. The

Comparison with previous

Global recessions. Prior to this year’s event, there

Sanchez (2005); and Jo (2014).

driven. It reflected a global recession as well as an unwinding of

Impact of past plunges. Most of these plunges

plunges. In the first year of both supply- and

wide ranges of impacts. A demand-driven 30 percent oil price decline

• Policies mattered. Energy-exporters tend to be

However, the expected “shot in the arm” to global

vulnerable to oil price declines (Aslam et al. 2016).

• Fiscal policy tightening in energy exporters.

• Monetary policy tightening in energy exporters.

deteriorating security conditions.

13 See Danforth, Medas, and Salins (2016) and World Bank

• Policy tightening in energy-importing EMDEs.

BOX 4.1 Reforms after the 2014-16 oil price plunge

Algeria, Bahrain, Cameroon, Ecuador, Gabon, Ghana, the Islamic

FIGURE 4.1.1 Reforms since 2014

• Tightening financial conditions. Flight to safety

Obstacles to policy effectiveness in EMDEs.

Macro-financial vulnerabilities in energy

example, Bahrain, Ghana, Malaysia, Qatar), and a

Currently, responding to the health emergency

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