oil price collapse is a drag on global economy

The International Monetary Fund said Tuesday that the sharp collapse in the price of oil is proving more of a drag on the global economy than a stimulus.

The financial strains on exporters and the deep investment cutbacks in the industry are more than offsetting the expected gains from cheap oil enjoyed by key importers like Japan and the United States, the IMF said.

Lower crude prices would normally stimulate some demand in countries where it is a key household and business cost, and spur more economic activity, the Fund said in its updated outlook on the world economy.

However, it said, after a 70 percent fall in prices over 18 months, other factors have dampened the expected gains from that decline.

Firstly, it said, "financial strains in many oil exporters reduce their ability to smooth the shock, entailing a sizable reduction in their domestic demand."

Secondly, the price fall has forced oil and gas companies to cut back investment, a negative for economic growth.

Moreover, the Fund noted that demand for oil had not picked up as the price has plummeted.

It said that factors behind that included, possibly, that cheaper crude prices were not being fully passed on to consumers, and, secondly, that businesses and consumers in some areas might still be reducing spending and debts. 

The IMF report was finalized before crude prices fell some 22 percent in the first two weeks of the year as traders prepared for Iran to return to the international market.

Even so, the IMF forecast included another 17.6 percent decline in crude prices this year after nearly 50 percent in 2015, and only a partial rebound in 2017.