Winners and losers of cheaper oil in Estonia

• Cheaper oil boosts consumption and cuts production costs
• Lower energy prices reduce oil shale revenues
• Less expensive oil also diminishes export demand

Cheaper oil boosts consumption and cuts production costs
The positive oil price shock is expected to lift households’ real disposable incomes and companies’ profit margins in several sectors. Companies will benefit from lower energy costs and the higher real purchasing power of households. Spending on motor fuels amounts to around 6% of final consumption expenditure of households, i.e., around EUR 1,000 per household per year, on average. If oil prices were to decline by 30% in euros this year, then consumption would increase by less than 1 percentage point.

Lower energy prices reduce oil shale revenues
In 2014, the trade deficit of mineral products in Estonia was around 2% of GDP. Estonia imported petroleum and coal, but exported electricity, peat, cement, and crude petroleum oils. The good news is that the prices of electricity, peat, and cement are less directly linked to global crude oil prices, and the volumes of oil shale’s fuel oils are relatively small. The production of the fuel oils from oil shale constitutes around 2% of Estonia’s GDP and employs around 3,500 people (0.6% of total employment in Estonia).

Less expensive oil also diminishes export demand
Even when cheaper oil benefits Estonia’s consumers and a large part of its producers, it will reduce demand in net oil-exporting countries like Russia and Norway. The economic crisis in Russia – although not entirely caused by cheaper oil – will also worsen the outlooks for the Baltic economies and Finland. As a result, Estonia’s export market growth rate is lower, even when cheaper oil is believed to lift the economic growth rate of the EU and the world as a whole.

Source: Swedbank

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