December 4, 2007
Oil prices could help beat subprime problem
By Daniel Gros The global economy has been hit by two shocks: the subprime lending crisis and high oil prices. The latter have faded into the background as prices have stabilised near record levels. But it would be a mistake to underestimate their importance. The recent surge in oil prices makes a rebalancing of the global economy more difficult, but it might in fact facilitate adjustment to the “subprime” credit crisis. The core of the issue is simple: oil producers tend to save about half of their windfall gains from higher oil prices. If the oil price stays around $90 a barrel, oil producers will increase their current account surpluses by $200bn-$300bn a year. The question will then be: who is willing and able to run corresponding deficits? Apart from the US, there are only two regions large enough to contemplate a shift in the external position of this order of magnitude: the eurozone and Asia (Japan and China).
The remainder of this column can be read here. Debate from our guest economists appears in the comments below.
Brad Setser: My sense is that the transmission channels that allowed the US to offset a rise in petro-savings are broken on two fronts:
First, the oil exporters themselves are a bit less inclined to hold dollars (tho some GCC central banks may nonetheless end up with a lot more dollars than they expected as a result of speculative inflows);
And second, the transmission channels inside the US that allowed households to borrow against the capital gains on their homes (capital gains stemming in some sense from petro-savings) are now not working.
Someone clearly has to lower their savings (v investment) to offset the rise in petro-savings associated with the recent rise in oil savings.
But on current trends, I would have bet that the fall in savings (v. investment) would most likely come from Europe, and particularly the periphery of Europe. Big inflows into the eurozone from the petro-states seem right now to be used to finance deficits in eastern Europe.
The imbalances there are almost as striking as the imbalances in the US household sector. But that transmission channel as of now doesn’t seem to be broken.
Posted by: brad setser | December 13th, 2007 at 6:41 am | Report this commentDaniel Gros: It is clear that at present there is little one can do to re-start mortgage lending on a grand scale in the US. However, my argument that higher (mainly dollar) savings by Opec countries help overcome the sub-prime crisis still holds.
The external channel clearly works: the last weeks have seen several deals in which oil-based funds have contributed considerably to strengthen the capital base of major banks.
The internal channel should also work: lower interest rates make it easier at least for some homeowners to stay current on their mortgage even as prices go down and they cannot refinance.
Posted by: Daniel Gros | December 13th, 2007 at 5:08 pm | Report this comment