Oil shock is changing the energy - and geopolitical - landscape

Oil shocks four decades ago transformed the world economy and geopolitical landscape, and the latest oil crisis threatens to do the same. While oil-consuming nations celebrate, the exporting nations anticipate unprecedented economic and political challenges. Most countries are importers, so they will benefit from lower prices.

Lower prices improve economic prospects by way of two main mechanisms. The first is through better public finances. In many developing countries, governments sell fuel for cars far below the market price. But subsidies discourage fuel efficiency, exacerbating global warming. And they impose a dangerous burden on public finances; governments are on the hook when oil prices increase.

Some developing countries have taken advantage of lower prices to cut or eliminate the subsidies. Indonesian President Joko Widodo, for example, is developing a plan to redirect public spending to more productive uses, such as infrastructure or education.

The second mechanism by which oil consumers benefit from lower prices is straightforward - households have more money to spend on other goods. In the US, for example, lower prices may save consumers US$125 billion over the coming year. Chinese consumers will also notice the economic effects as energy costs influence the price of food.

Both the short- and long-term effects of lower oil prices bode well for the global economy. But there are downsides, too, including threats for Japan and the European Union. Japan has suffered from years of falling prices and low inflation, and the governor of the Bank of Japan has declared a goal of returning Japan to "normal" levels of inflation, meaning an increase in prices each year of at least 2 per cent.

Similarly, falling prices in southern Europe, coupled with stagnation in Germany, threaten to pull the entire euro zone into sustained deflation. For both Japan and the EU, lower oil prices complicate monetary policymaking.