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Lower Oil Prices Hurt Oil-Rich Economies

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This year opened with some big market fluctuations, but blaming it all on the descent in oil prices is misguided. Here is a closer look at the many ways that lower energy prices help U.S. consumers.

Following the spike in market volatility in January, a quick reading of the financial press would have you believe that all the woes in the world are attributed to the plunge in oil prices. This is a curious conclusion. While lower oil prices are a negative for Russia, Venezuela and highly leveraged oil and gas exploration and production companies, the drop in energy prices is a positive for the economy, particularly consumers.

lower oil prices hurt oil-rich economies

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Market Realist – Lower crude oil prices could hurt the growth of oil-rich economies.

The graph above shows the performance of the VanEck Vectors Russia ETF (RSX), which tracks Russian stocks, and the return on crude oil prices since July 2014. While WTI (West Texas Intermediate) fell by 53.2% since then, RSX eroded investor wealth by 35.7%. However, both recovered in February.

Russia’s fortunes are heavily linked to oil prices. A slump in oil prices is a huge negative for the Russian economy. Oil rents are the difference between the value of crude oil production at world prices and the total costs of production. Oil rents make up 13.9% of Russia’s GDP (gross domestic product), according to the World Bank.

Along with Russia, other oil-rich economies—like Nigeria, Venezuela, Iran, and Saudi Arabia—bore the brunt of being too dependent on oil.

However, certain markets that are net importers of oil—like India (EPI), China (FXI), Japan (EWJ), and even the US (SPY)(IVV), among other economies—gained due to the slump. The rest of the series explains why.

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