The typical assumption that low oil prices are good for the global economy can no longer be held to be true, especially in the United States, according to Abu Dhabi Investment Authority's head of research.

In an opening address at the Alternative Investment Management Summit in Dubai on Monday, Christof Ruhl, head of global research for the world's third-biggest sovereign wealth fund, said that the shale revolution which has taken place over the past five years in the U.S. "alters the equation in a time-honoured way" between growth and oil.

He said that, traditionally, economists have said that a $10 decline in the price of oil equates to a 0.2 percent boost in global economic growth. "That relationship seems to have disappeared," he said, stating that in the U.S., at least, higher oil prices now equate to higher trade levels and higher investment. "The old thing that higher oil prices hurt consumption and vice versa is disappearing, as the U.S. consumer benefits from higher prices in some parts of the country and suffers from them in other parts.

"I'm not saying the U.S. is becoming a petro-economy soon, but it is clear that the relationship between oil prices and the U.S. is on the verge of changing in the sense that higher oil prices can be shown to be beneficial for U.S. growth," Ruhl said.

U.S. President Donald Trump has recently taken to social media platform Twitter on a number of occasions to call for lower oil prices.

On Sunday, November 25, Trump thanked himself for his role in the recent drop in oil prices, which have declined from $85 per barrel in early October to just below $60 per barrel by 1025 GMT on Monday, 26 November. With regards to this issue, Ruhl said that "the current tweets either don't know that or, more straightforward, are just directed at an electorate that just happens to be in one part of the country and drives very big vehicles".

"The relationship between oil prices and growth for the advanced economies has disappeared and in the U.S. is on the verge of turning upside down," Ruhl said. He argued that the increase in shale production in the U.S. had completely removed the portion of the U.S. balance of payments deficit caused from energy imports, even if the overall deficit "has stayed constant or even increased".

In a subsequent panel on the prospects for oil-producing emerging markets, Ryan Lemand, senior executive officer of ADS Investment Solutions, said that there is currently an "excess supply of oil" in world markets, with the total amount of supply coming from the U.S. increasing by 11 percent in the past year.

"Demand hasn't increased as much - demand increased by 1.53 percent, total supply increased by 2.5 percent," he said, explaining the factors behind the recent price decline. However, he said that his firm's long-term forecast for oil prices is between $60-$80 per barrel, with prices likely to rise given an underinvestment in infrastructure in the sector in recent years.

He said that $80 of every $100 spent in capital expenditure in oil infrastructure is in replacement of existing infrastructure of wells that have depleted, but that in 2015 and 2016 spending on infrastructure in the sector dropped by 25 percent and 27 percent respectively. "We are below the levels of staying flat. Not enough money is being spent on infrastructure to replace these wells," he said.

He also said the stock-to-consumption ratio - the amount of oil capacity stored "is at the lowest ever" at 45 days’ worth of supply. "This is another fundamental driver to push prices up," said Lemand.

(Reporting by Michael Fahy; Editing by Shane McGinley)
(michael.fahy@refinitiv.com)

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