Economic Winners and Losers in the Oil Price Plunge

Economic Winners and Losers in the Oil Price Plunge

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Event Description

Charles Collyns, managing director and chief economist at the Institute of International Finance, James Stock, economics professor at Harvard University, and Mark Zandi, chief economist at Moody's Analytics, join Yahoo! News anchor Bianna Golodryga, to exchange views on the recent oil price plunge. The panel discusses the positives and negatives of lower oil prices on the U.S. economy and internationally, and effects on inflation and monetary policy.

This meeting is part of the Geoeconomic Consequences of the Oil Price Plunge symposium, which is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

Event Highlights

James Stock on the effects of lower oil prices on monetary policy:
“…there seems to be a very small pass-through so far.  …If we see further declines and if we see further evidence or any evidence of pass-through from energy prices into core, that would be a problem for the Fed because you just don't want to have inflation running down far below its target. It also means, of course, that the economy is being stimulated. And as the economy is being stimulated, that's another source of growth. So these two features cut, in some sense, against each other for monetary policy.”

Mark Zandi on oil price decline and the financial system:
“My sense is, the financial system is broadly insulated from the decline in prices. It'd have to be a pretty further serious decline in price for an extended period of time before it did enough damage that it would engulf the financial system into a deeper problem. In large part, because the system is incredibly well-capitalized.”

Charles Collyns on Saudi Arabia and the dollar peg:
“Saudi Arabia has massive exchange reserves and they have plenty of ammunition to sustain the peg for as long as they want to. The Saudi attitude is that the peg exchange rate has been an anchor of stability and expectations of low inflation and I think they would see abandoning the peg as a move that would increase the degree of uncertainty and potentially injecting volatility into the market. That's something that they will resist for a long time and they certainly have the resources to make that decision.”

GOLODRYGA: Good afternoon, everybody. It's nice to be inside on this frigid Monday morning. I want to get to the topic at hand and that's obviously the economic implications of lower oil prices. And I'm going to introduce my esteemed panel of experts here, who really need no introduction to you all.

Charles Collyns is actually joining us from DC, managing director and chief economist, the Institute of International Finance; James Stock, professor, department of economics at Harvard University, member of the Council of Economic Advisors from 2013 to 2014, and Mark Zandi, chief economist, Moody's Analytics. Welcome, gentlemen.

So, I want to begin by where the last panel actually ended. One of the questions that Betty posed was, would anybody predict seeing $100 oil in the near future? Ever again? In this decade? I wanted to get your thoughts.

Starting with Mark.

ZANDI: Well, because I am in the forecasting business, I actually have to have a point forecast which is a big problem in predicting oil prices.

But I do expect we'll be back to $100 oil before—within a decade. I think that's very likely. That commodity markets and the oil market respond to price. We could see that when prices were high. We saw supply come out of nowhere seemingly. We saw a strong demand response. And that laid the seeds for this weakness in prices that we're seeing now.

And now that we're seeing very weak prices, immediately we're seeing a supply response. Rig counts are down, investment's down, financial markets are adjusting. The cost of capital for investing in the energy sector is now a lot higher. The uncertainty with regard to prices has just added to that.

And then the demand side, already we're seeing, if you look at the types of vehicles that are being purchased are gas-guzzling SUVs. The amount of miles being driven, I think the last data point is November, is up 1-1/2 percent from a year ago, and that's the strongest rate of growth in many, many years.

So we're getting a supply response, a demand response. So yeah, I think we'll see $100 oil again in the next decade.

GOLODRYGA: In the next decade.

And Jim, you?

STOCK: Yeah, I'd agree with that. I guess the one thing—and I'd like to come back and talk about the demand response maybe as we go because I think that's an important thing to keep in mind.

But one thing to remember is that we've always been surprised by oil price fluctuations. Who a year ago would have thought that we'd be having a conference right now? You didn't plan it a year ago and there's a reason you didn't plan it a year ago because this wasn't your forecast.

And we've seen big oil price fluctuations that are always a surprise in the past. And I think we just have to keep in mind that volatility is really too easy just to jump in and say we've got a new normal and the new normal is going to be at a marginal cost of production of, pick a number, $50 a barrel, something like that, and that's just going to change, that's just going to stay there for a long time. I think there's always these unexpected events that result in substantial, unexpected fluctuations.

So $100, sure, that seems reasonable to me or a possibility to me over a medium term.

GOLODRYGA: If you would have expected, as you mentioned, such a drastic decline in such a short period of time, including OPEC, it seems.

And I want to turn to Charles in D.C. because the FT is reporting that the recent oil slide could trigger an emergency OPEC meeting. Wanted to get your thoughts on that. I know that that was something discussed in a previous panel as well.

COLLYNS: I don't know, I think the Saudis are pretty set on their strategy of letting the price find its level and have implications, both on the supply side and on the demand side.

Unlike the other speakers, I'm perhaps a little bit more bearish on the outlook for oil prices. I mean, certainly there are cyclical factors that will push up the price of oil going ahead.

On the other hand, I think there are also structural reasons why there has been a real shift in the market. If we do believe that the global rate of growth is no longer going to be as strong as it was before the prices, and I think there are many reasons to think that, and if we think that there is a real supply response, both in terms of increasing efficiency of consumption as well as increasing use of unconventional sources of energy and unconventional sources of petroleum, I think the combination of those factors means that the trend in oil prices is no longer going to be as strong as we've seen in the past where we get a cyclical pick up.

We're not going to see a return to the very strong oil prices that we saw in the last few years, at least not for a decade.

GOLODRYGA: So a mixed panel here.

Mark, I want to turn back to you because one analyst I was reading is quoted as saying oil prices are the canary in the coal mine, I don't think the global economy, especially in the United States, is all rainbows and unicorns right now.

Do you tend to disagree? You believe the main reason we're seeing this drop is because actually there was an increase in healthy demand from consumers.

ZANDI: Yeah. I think if you decompose the reasons for the decline in oil prices, I think the majority of the price decline can be explained by supply, just the enormous increase in supply, particularly from North American shale. But Libya came back online, that was a significant amount of oil. So I think that's the key reason.

Demand, global demand, probably played a secondary role, particularly slower growth in China and the emerging economies took a little steam out of the growth in global demand.

And then of course the other factor is the stronger value of the dollar, which puts downward pressure on the dollar price of oil.

So if I kind of had to put a number on it, I'd say two-thirds of the decline is supply, another 20, 25 percent is demand, and the remaining 10 percentish or so—I don't know if I did the arithmetic right, but you know—10 percent—about 10 percent of that is the dollar, strength and value of the dollar.

GOLODRYGA: And Jim, your thoughts?

STOCK: Sure. I think that sort of the canary in the coal mine question, look, U.S. economy has been growing really well over the last year, certainly over the last nine months. We've seen substantial declines in the unemployment rate, strengthening in the labor market, strong GDP reports. Those GDP reports reflect a lack of a lot of the problems that we had earlier in the recovery in terms of fiscal drag, winding down the ARRA in particular, but other sorts of programs that were designed to boost the economy coming out of the recession.

And so now if you add the oil price decline on top of that, there are quite a few analysts who have made estimates of what the effect of that might be on U.S. economic activity. Those estimates are in the, say, half-a-percentage-point range, plus or minus, you know, with plus or minuses around that over the course of a year.

So if you go from Q3, 2014 Q3 to 2015 Q3, you might see adding GDP growth as a result of this in the vicinity of half a percentage point, maybe a little bit more. So is this a harbinger of bad news? Well, I would say for the U.S. economy, in terms of short-run macroeconomics, no, I would say this is a net good news.

Obviously there are areas in which there's pluses and minuses. One of the minuses is, of course, within production and in the states where production is going to be slowing down, the growth of production will be slowing down and possibly even flattening. But by and large, it's a net positive, it's net positive for consumers.

And most importantly, the number-one effect is that we're sending fewer dollars abroad. So if oil is down by $50 a barrel, that means for each barrel on net, because we're a net importer of oil, we're just sending less of that to the countries from which we import oil. So that's a positive. That's a big positive right there for the economy.

GOLODRYGA: Yeah, we'll talk about the implications it has for states as you mentioned, like my home state of Texas, later on.

But I want to talk about industry-specific winners from the decline in oil prices, airlines and automakers in particular. Major airlines, carriers, saw their shares surge since October, shares of major carriers have continued to surge. And senior officials at these companies say that having a fuel cost will go straight to the bottom line to benefit stockholders and provide funding for stock buybacks. Southwest actually plans to accelerate its growth for fuel costs if it remains low as well.

Do you see it trickling down to passengers and shareholders the way these CEOs do, Jim?

STOCK: Sure. Well, I don't have airline pricing data on the tip of my tongue, but my impression is that airline prices have gone down substantially, so we're seeing certainly pass-through to consumers, we're seeing strengthening in stock returns, we're seeing substantial contributions of airlines to GDP growth. So that's actually a great example and a leading example of where you're seeing not so much demand-side responses, but supply-side responses, because they're able to provide their product, which is transportation services, at a cheaper price.

GOLODRYGA: And Mark, you mentioned automakers earlier. Are we starting to already see a shift in behavior from consumers with regards to going back to gas guzzlers which in fact are more productive and bring more bottom-line dollar revenue for the company?

ZANDI: Yeah, I think that's in the data. I mean, there's a lot of other things going on in the auto market that are supporting auto and vehicle sales and helping to support purchases of larger vehicles other than gasoline prices. And it's much easier to get an auto loan today than it has been in many, many years just as an example of that.

But I do think the lower gasoline prices are having an impact on what people are buying. The F-150 is a fantastic seller. I don't think that would be the case in the world of $3.50 for a gallon of regular unleaded. At $2.50, yeah, it makes a lot more sense. So I think it is having an impact already.

And I mentioned the driver miles. That has been very—surprisingly responsive to the decline in gasoline prices. I mean, it had basically been going nowhere in most of the economic recovery. Prices fell and as soon as they fell, boom, you know, you can see—and you know, I don't know why I spend to much time on it. Maybe because it's such a visible price. But my kids when they're driving, and I have three kids, they're all of driving age, and when it was $3.50, $4.00, I would, you know, say, well, don't drive the old Volvo—sorry, Volvo—you know, I mean, that thing sucks down a lot of gasoline. But now I say, you know, all right, no worries.

GOLODRYGA: Go ahead and take it. Reminds you of the first days when cell phones just came out, right? You only use them in brief emergencies.

Charles, let's turn to you in D.C., and focusing on overseas ramification as well, let's talk about the winners. One has to assume energy importers, Japan, South Korea, East Asian countries and India, are real winners here.

COLLYNS: Yeah. That's definitely a good list of countries. One point to emphasize, though, is that the benefits to the oil importers, the benefits to consumers are not quite as large in these other countries relative to the United States. The United States, I think the benefit will be particularly substantial, one reason being that the reduction in domestic prices of domestic gasoline is the largest in the U.S. In other countries, you have depreciations and the local currency against the dollar, so the euro, for example, down 15 percent against the dollar, that reduces the extent to which prices drop in euro terms.

The other factor is that these other economies are much less energy-intensive than the U.S. So in the euro area, the use of oil relative to GDP is around two-thirds of the U.S. So overall, the benefit to European consumers is only around half of what we see in the U.S., and that's true elsewhere.

On the other hand, if you're looking at Europe, if you're looking at East Asia, these economies don't have the negative impact from the production side. So it's a more uniform set of winners without an offset from the losers.

So in total net terms, there certainly are substantial benefits for this group of oil-importing countries.

GOLODRYGA: Can we talk about India in particular and why this may be a real growth opportunity for the country?

COLLYNS: Definitely. For India, it's a win-win-win situation. You get the benefit of lower oil import prices, raising real disposable incomes, but you also get a big policy premium. The central bank's been able to cut interest rates more quickly than it otherwise would have been able to because the lower petroleum prices have brought down inflation. Inflation had been a concern to the Reserve Bank of India, it's been able to act more aggressively to lower prices to lower its interest rates.

In addition to that, the Indian government has very cleverly taken the opportunity to substantially cut back on energy subsidies which have been a big drain on the budget. So it's helped India in terms of the path towards fiscal consolidation which had been another challenge that India had been grappling with for a number of years.

So in fiscal policy and monetary policy as well as the straight bonus to consumers, India is gaining quite substantially.

GOLODRYGA: You talk about monetary policy overseas, I want to come back to the U.S., Jim, because this is something you actually wanted to address, the impact lower energy prices do have on monetary policy. A lot of people expect the Fed to act, come next fall or this fall. What are your thoughts?

STOCK: Sure. Well, so the most important and the most salient feature of this is just the direct effect on inflation. So inflation, say, headline CPI inflation, twelve-month inflation was running around 2 percent back in June and now it's running around 0.7 percent. PCE, personal consumption expenditure inflation is a somewhat better measure than CPI. CPI has some biases in it and some coverage issues, so something that the Fed tends to look at also is the PCE inflation series. And that's a little bit lower. But again, the headline has had a great big drop, almost all of that drop is associated with the drop in energy prices, particularly the drop in oil prices.

I think a big question—so just to set the stage, if the Fed's inflation target is 2 percent and inflation, say PCE headline inflation is 0.7 percent, that is a big distance below 2 percent, that is an uncomfortably large distance below 2 percent. We do not want to find ourselves in a circumstance again where we're running the risk of having a deflationary situation or having inflation getting any closer to zero. That would be a problem.

So what really matters is paying close attention to whether or not there's any pass-through of this energy price inflation to the non-energy-price components. So in particular, is there a pass-through of the decline in oil prices, energy price deflation, into a disinflationary effect on core.

So far, the answer is not much, maybe a tenth, maybe a couple tenths of a percent on a year-over-year basis. But there seems to be a very small pass-through so far.

That's consistent with much of the historical evidence. There were big pass-throughs from energy prices to inflation back in the '70s and the '80s, much less in the '90s and the 2000s. We seem to be in that better regime now associated with credible Fed policy.

If we see further declines and if we see further evidence or any evidence of pass-through from energy prices into core, that would be a problem, I would think, for the Fed because you just don't want to have inflation running down far below its target.

It also means, of course, that the economy, as we mentioned, is being stimulated. And as the economy is being stimulated, that's another source of growth. So these two features cut, in some sense, against each other for monetary policy. The low levels of inflation that we're seeing, especially headline inflation, suggest that you want to continue having an expansionary monetary policy. On the other hand, this new source of stimulus to the economy suggests that you might be back in a time—you might be wanting to consolidate and pull back to allow short-term interest rates to rise maybe even earlier than scheduled.

I think that's a real tension. Where I myself would side is really being more concerned about the downside of disinflationary pressures than I would be at the moment about the upside. We just haven't seen too many signs of any nascent inflation through core.

GOLODRYGA: And not to be Debbie Downer here, but if we did see a pass-through, what level, what metric. would start to alarm you, Mark?

ZANDI: Well, I think the key for monetary policy and the deciding factor perhaps with regard to oil prices and what it means for monetary policy is what affect it has on inflation expectations.

And so far, the evidence is consistent with Jim's concern. If you look at inflation expectations as embedded in the financial markets, you know, five-year forward just as a measure of that, they have fallen off quite substantively. In fact, if we go back this time last year, they were 2-1/2 percentish, now they're definitively below 2 percent.

So that seems to suggest some breakdown in inflation expectations. Now, that's not atypical when oil prices fall. So you know, maybe that will also be temporary. But I think it's also something to watch very carefully.

And if survey-based measures of inflation expectations start to break down, like the University of Michigan survey expectations or the Philadelphia Fed survey expectations start to wobble and weaken, I think that would be corroborating evidence that there is something really going on here. Inflation expectations are weakening and that reinforces Jim's point that maybe, you know, you want to err on the side of waiting a little bit longer before we raise interest rates. But I don't think we've seen that yet in the survey-based measures, not quite yet. But I think that's, for me, that's what I would be watching.

GOLODRYGA: What to look at. OK.

STOCK: I mean, really, one of the remarkable things is that throughout this recovery, those survey-based measures have been so stable despite the really large swings in output and unemployment.

ZANDI: Of course, I contribute to the survey, so maybe I should just be watching me.

GOLODRYGA: Right. Whatever he says.

ZANDI: If I start marking down my inflation expectations, why, run for the hills.

GOLODRYGA: Charles?

COLLYNS: Maybe I could jump in here.

GOLODRYGA: Sure.

COLLYNS: I think it's important what the panelists have said about the Fed is interesting. What strikes me is the contrast between the Fed's attitude towards the implications of the oil price drop for monetary policy and what you see in the ECB.

I think the Fed has tended to look through the impact, the short-term impact on inflation, towards the positive impact on demand that Mark alluded to. Whereas the ECB, I think, is much more concerned at the potential spillover of lower energy price inflation to non-energy price inflation, particularly since I think the ECB has less credibility, it's lets inflation move sequentially much lower below their targets to close to zero. And in fact, at the current time inflation in the euro is negative.

And indeed, it prompted the ECB to launch sovereign QE last month, which I think was an important step forward to help solving the bigger European problem of lack of demand. I think it gave an additional reason to be bold in pushing forward a very aggressive monetary policy.

So I think an interesting contrast between ECB and the Fed.

GOLODRYGA: Not necessarily in lockstep here.

And Charles, I want to stay with you. We talked about the winners from lower oil prices. Let's talk about some of the losers, too. Obviously, we're talking about oil-producing nations, OPEC in particular. What is Saudi Arabia thinking? And is this just to punish Russia? I mean, are they playing Russian roulette literally?

COLLYNS: No. I think Saudi is thinking about its economic interests. And as was discussed in the previous panel, it's no longer prepared to play the role of supplier of last resort and to be the one that's forced to cut back its production when global demand is weak.

I think it sees its long-term interests in being—maintaining its market share and squeezing the higher-cost marginal producers out of production, be they in Russia or elsewhere, and also discouraging perhaps some of the momentum towards energy-saving consumption.

In the short term, Saudi has huge resources in terms of piles of foreign assets, a reasonably strong fiscal position. So although the Saudis are being prudent in terms of their fiscal planning, we don't expect them to severely cut back on their government spending as a result of lower revenues. They'll be using their stockpile of resources.

However, for other countries the situation is very different. There are a number of countries that do not have particularly strong fiscal positions that have essentially squandered the years of very high oil prices and are now being pushed against the wall. Countries like Venezuela—I think is the biggest example of this, but other countries, too. Russia would be one of them, and Nigeria, Ecuador, are countries that are clearly suffering.

We've recently gone through a new forecasting round and we've lowered our growth forecast for all these countries in this latter group by 2 to 5 percentage points. So it's a really pretty major effect, and I think that is interesting also in terms of the implications for geopolitics that we'll be discussing in the last session this afternoon.

One point I would like to make here is that the impact is not just on the oil exporters, but also the friends of the oil exporters. So for example, Venezuela is cutting back on the subsidies it's been providing through Petrocaribe to a number of its lower-income neighboring countries, countries like Nicaragua, for example, who will no longer be able to get access to very cheap oil from Venezuela.

And within the Gulf, there could be impacts on the flow of resources to friends of Saudi Arabia, to friends of Kuwait and the UAE. Countries like Egypt or Lebanon or Jordan may see the foreign exchange that's coming from the Gulf cut back, as these countries as less resources to invest overseas.

GOLODRYGA: Yeah, we saw the implications already with U.S.-Cuba relations stemming from Venezuela as well.

But going back to the U.S. and who is hurt by lower oil prices, let's go back to states like Texas and North Dakota who have really weathered the storm of the great recession. In fact, I was shocked by this number. Texas added 1.4 million jobs since the recession started in 2007. Do you see that state actually being hit hard now? Or do you think that it's diversified as an economy in comparison to where it was, let's say, in the 1980s?

ZANDI: I think it'll be hurt, but it'll weather the storm, I think, well, particularly compared to the 1980s.

Last year, Texas created 400,000 jobs. Of those 400,000 jobs, 40,000 were directly in the resource and mining sectors, so that's the energy sector. Let's just assume there's a multiplier of two, so you've got other activity generated from the incomes created in the energy sector, so let's say 80k of the 400k is energy related. And let's say that gets flipped on its head this year, you know. So instead of gaining 40k we lose 40k and there's an associated multiplier.

You know, it hurts, growth slows, but it's still growth and it still adds to the economy's, the macro economy's economic effort.

Now, having said that, that's Texas. Texas, as you know, is a big place. And so some places will get hurt and probably suffer what you might call a recession. So Odessa, Midland, these are very energy-dependent, still are, areas of Texas and they'll probably go into recession. Houston? No. You know, it's very energy-dependent, it'll perhaps come to standstill at some point later this year in terms of job creation, but I don't think it'll actually go into recession.

This goes to my final point and why this isn't the 1980s. The big difference between now and then in Texas and many other parts of the country is the banking system. Back then, the banking system was a state banking system, so you lent in the state that you did business in, you took deposits and you lent in that state. So when things went bad, it took out the entire banking system and you had a massive credit crunch in the state of Texas that completely eviscerated the housing sector and other industries and you went straight down.

Of course, now that's not the case today with the banking system. There's no more banks left really and, you know, big banks headquartered in Dallas or Houston.

GOLODRYGA: You see really health care and technology taking over, including Austin.

ZANDI: Yeah. So I think it'll hurt, no doubt, and it will feel different in a place like Houston, but I don't think it'll, you know, bend to a significant degree.

GOLODRYGA: Jim, your thoughts? Other states, North Dakota?

STOCK: Well, I would just add to that, in all of these different circumstances, obviously there's certain regions of certain towns that are going to be hit hard. But countervailing that there is this overall positive effect of people having more money to spend and so that's going to spillover maybe less into North Dakota, but into Texas; it is a diversified economy and so they're going to reap the benefits of people doing more air travel and the other sorts of things that people do now that they have more money in their pockets, that's not going abroad.

ZANDI: The other point is, in some of these states they're like Saudi Arabia. North Dakota is like Saudi Arabia in that they were very conservative with regard to the revenue that they got from all the shale production, so they have a nice reserve sitting there. And they're very conservative in terms of their budget. I know this because they're my client. They're very conservative in their budgeting and so they are well—if this goes on for a long time, yes, obviously it's going to have a problem. But they have enough in the bank, so to speak, to weather this for quite some time.

GOLODRYGA: Rainy days, a few rainy days ahead.

Any consolidation you see forthcoming within the industry due to lower oil prices?

ZANDI: Well, I'd be surprised if there isn't. You know, in my sort of view on this, I think one of the key things the Saudis wanted to do when they took this big step was to put the fear of God in the financial system. You know, there was this capital flowing directly into the energy sector with abandon and you could see that in the junk corporate bond market, you can see that increasingly in the bank lending. It was kind of a one-way, you know, I'm not worried about anything, I'm going to make a lot of money if I just, you know, finance these deals.

And I think what the Saudis have done is say, look, prices go up and they go down and they go all around and there's a lot of uncertainty in this market, you better price that into the cost of capital. So what they're doing is they're going to—the credit spigot is not going to close completely, but it is going to be much more cautious going forward. And if that's the case, then I think there will be consolidation because a lot of these energy companies, particularly smaller ones, obviously, were very dependent on that credit spigot remaining wide open. It's not, they have no choice but to say, OK, you know, I had my day and let's go onto another challenge.

GOLODRYGA: Jim and Charles, you can follow up on this as well, but what are the implications lower oil prices have on climate policy and investments in technology? Is there less of an incentive for companies to spend a lot of money in technology now?

STOCK: So this is a really important question. There's—I think that the conversation so far has been focused either on the last six months or the next six months. But it's important to remember a couple of things about the medium-term and about the longer term.

In the medium term, well, bear in mind we've had a decline in net imports—net oil imports in the United States from in the vicinity of thirteen million barrels per day back in 2006, down to around 4.5 million barrels per day in November of this past year, which is the most recent data. That's an extraordinary change. But now what's happening is that—is that—in my view a real chance that that's going to stall out or possibly even reverse for two reasons.

One reason that we've been talking about, which is decreasing domestic—rate of growth of domestic production. But the other one is just increasing domestic consumption. So EIA which has I think quite conservative elasticities as the last panel had quite conservative elasticities, has already marked up since June—it's already marked up its 2015 forecast by 2.4%. That's quite a bit. So if you think about gasoline consumption—gasoline consumption fell by around 6.5% from 2007 through 2012 and that was expected to be static and then declining even further. That—that trend has already started to reverse.

I actually think that that marking up of 2015 really is an understatement. I wouldn't be surprised—although a little bit out on a limb—but I wouldn't be surprised to see if 2015 or 2016 goes up from 2014 not by 2.5% but maybe by 5% or even 7% or even 8%.

ZANDI: What's that Jim? What?

STOCK: Yes.

ZANDI: What was?

STOCK: Oh, I'm sorry, gasoline consumption.

ZANDI: Oh, gasoline consumption.

(CROSSTALK)

STOCK: I'm just talking about gasoline consumption.

ZANDI: Right.

STOCK: So gasoline consumption, EIA has already marked up 2015 by 2.4%. I can see by how 2016 we might have—be up cumulatively by 8%. That is a lot. So that's a really big change and that could change this entire trajectory of declining net imports and it changes our energy security picture in a major way and it makes us more vulnerable to the sorts of shocks that—we're benefiting from the downward shock, but we can be hit by the upward shock. So that's one thing.

And then the other one is what you just mentioned, which is the climate perspective. My goodness—I mean the transportation sector has enough challenges at $100 oil about figuring out what the—what is the—what's the thirty year strategy for a low GHG, a low—a low carbon transportation future and that is a much bigger problem at $50, but at the same time it's arguably even a more pressing problem because we're seeing consumption going up at the same time as the economics of well—take your favorite, fuel cells or electric vehicles, or cellulosic, ethanol or whatever—becomes much more challenging.

GOLODRYGA: Well, we know the highway bill is coming up for reauthorization this year as well, given the decline in gas prices, is now the time to increase the gas tax?

STOCK: You're asking an economist.

(LAUGHTER)

GOLODRYGA: Truth be told that question came from my husband who's also an economist, okay, full disclosure.

(LAUGHTER)

STOCK: Seems like a good idea.

(LAUGHTER)

GOLODRYGA: Charles, your thoughts?

COLLYNS: Yeah, I mean, the other—the other side of this is—is in the U.S. we're talking about raising the gas tax, that does seem like a very good idea, but perhaps unlikely to happen any time soon, unfortunately. But in other countries they are actually moving towards reducing gasoline subsidies and that's pretty important from a long term sense. If we can have a permanent shift away from subsidizing the use of gasoline, that that would be a substantial benefit to the global economy, reduce some of these climate change concerns that Jim mentioned.

We've already seen a number of countries moving in this direction—India we've mentioned already, Indonesia, Turkey, Brazil—are all countries that have taken the advantage of lower current prices to reduce their subsidies. I think the—the big—big question is whether the Gulf countries will move in a similar direction. Saudi Arabia has—has a massive subsidy on its use of—use of oil in Saudi Arabia, and that's encouraged a hugely inefficient energy sector in Saudi Arabia that is potentially very damaging to the global environment. If there's a shift in Saudi's behavior I think that would be a—that would be a big plus.

GOLODRYGA: And Mark, you and I go way back to my days at Good Morning America, and I've been to just about every gas station in the tri-state area when gas prices were up and down and following every penny shift, and Mark was my go-to man. And we talked about the change in consumer behavior and how high gas prices will forever change the way consumers drive, the way the go to work, the way that they live life. I've interviewed people who got their vegetable fuel—vegetable oil from the local Chinese restaurant, is that the wave of the future? And a lot of companies were promoting carpooling—we didn't really see such a huge shift in consumer behavior.

A year from now, if we still see the decline in—in—in gas prices as we have continued to see the past few months, do you see Americans and consumers behaving differently to such a drastic extent?

ZANDI: Well, I think—I think we did change behavior. Yeah, I mean, I think we—at $3.50 people drove differently. They were focused on gas mileage and, you know, what kind of cars they were buying. You know --

GOLODRYGA: But do you see a reverse effect?

ZANDI: Yeah, I—if we stay low, yeah. I think Americans are—Americans in particular are very—business and households—very sensitive to price. We adjust rapidly. Unlike in other parts of the world, in part because they have subsidies and they have price controls and things that shelter the households and businesses from what's going on in the marketplace, much less so here. So we adjust pretty rapidly. I mean—both—again—both on the supply side and on the demand side. So I think yeah, we will—we will change. I agree with Jim. His—his—price —his demand elasticity  were quite large. I'm not sure I'd—I'll take that bet maybe.

(LAUGHTER)

ZANDI: But—but you know—I sympathize with what he's saying. I think our behavior will change relatively quickly. One thing about behavior though, just changing the subject slightly, something that bothers me a little bit—is the behavior of consumers in terms of spending, in response to the—broader spending patterns, you know. You look at retail sales for example, we've had two months—two report—monthly reports that have been disappointing. Disappointing in that no real increase in core retail sales, yeah, big decline in gasoline, and some increase in vehicles, but you know sort of the basic stuff we buy, not seeing really any increase. And that's perplexing—it's increasingly perplexing in the context of the savings that American households are now experiencing.

I mean, suppose—suppose for example, we pay $2.50 for a gallon of gasoline this year, down from $3.50 on average last year. That's a dollar saving. The average American household's going to save $1000—$1000 over the year. That's a lot of money and you would expect a fair share of that would get spent. So you'd expect consumer spending is changed --

GOLODRYGA: And we hear the president saying that as well.

ZANDI: Yeah, again you expect consumer spending to kick into gear here. Now, it could be it's one of those things that it always takes a little longer than you think—you know it takes a while before the savings actually build up in the checking account where people feel like, oh, wow, I didn't know I had that much money. And then they go out and they buy the TV or whatever it may be. So it may be we're just, you know, a little impatient about this. But it's one thing that's starting to bug me a little bit. I mean --

GOLODRYGA: So what do you attribute that hesitation to?

ZANDI: I—I attribute it to that we're just impatient. I—I do—I'm all in. I think—you know—within the next month - two or three—we are going to see a spending pick up. We've seen it in the consumer confidence measures. Consumer confidence has lifted as you would anticipate, so people are—know it, they're feeling it, they—people are feeling a lot better. So I—you know, I—we've seen some debt repayment, savings are up a little bit as you would expect. But I now expect in the next couple, three months that we see consumers kick into gear and start spending more. But another month, then—then, I'm going to have to—I'm going to have to really think about how I'm going to answer that question.

(CROSSTALK)

GOLODRYGA:—have to reconvene this panel.

ZANDI:—What the heck's going on here?

GOLODRYGA: Jim, do you agree?

COLLYNS: But Mark, we did see—we did see very strong growth of consumer spending in October, November --

ZANDI: Good point. That's a good point.

COLLYNS:—anticipating the game from the reduction of oil prices. In fact at one point it looked like consumers were spending more on other products and they were saving on oil. Now—December, January is a bit of rebalancing of that. But to be overruled, when we look globally we do see a very strong growth in—in retail sales, in real terms, in the 4th quarter, certainly in the U.S., but also in Europe and Japan, and even in the emerging market economies—although not quite as strong as in the U.S. But we are seeing a real response there.

ZANDI: Yeah.

STOCK: And—and I'm from Boston and I'll tell you what we've been spending on is snow shovels.

(LAUGHTER)

STOCK: So -

(CROSSTALK)

ZANDI: I'm surprised to hear actually.

GOLODRYGA: Too bad people don't have the picture that you showed me. Incredible.

STOCK: So I think—I think you don't want to read too much into just one or two months, but I think that's a relevant thing to keep an eye on for sure.

ZANDI: Right.

GOLODRYGA: And before we open up to questions, we ended the last panel with the question of whether or not we'll see $100 oil. Will we see $20 or $10 oil? Eye roll?

ZANDI: Not for long. I mean you might get there with some event, but I can't imagine we'd stay there very long. I'd be surprised. Very surprised.

STOCK: Yeah, really surprised.

GOLODRYGA: Charles?

COLLYNS: I agree. Unlikely.

GOLODRYGA: Ok, so let's open up for questions here and then Charles, you'll be looking out for questions there in D.C. as well.

COLLYNS: Yep. Yep.

GOLODRYGA: Terrific.

QUESTION: I'm Mike Carey, Credit Agricole. Jim, you mentioned that you thought the stimulative effect from the decline in energy prices is about a half a percentage point over the next 4 quarters or so. Is that a net looking at the stimulus, the consumer side and does it also include the negatives from say reduced business investment spending?

STOCK: Yes. And that's—the answer is yes. So there's actually a bunch of things that factor into that. So there's the fact that we're sending less money abroad, and that is obviously a positive. There's the consideration on consumer spending—there's a shift in—in—in—even on the domestic side, consumers have more in their pockets, the owner of oil companies have less in their pockets, but the consumers have a higher marginal product of consumption—a marginal propensity to consume, excuse me. There's aggregate supply side effects, which is like the airlines that we've talked about.

But then there's negatives on that, which is of course the North Dakota, Texas part of it. And then the fact that there is a lot of uncertainty, and the fact—the volatility, just plain old volatility is bad for planning and bad for—bad for the economy. The fact that as Howard Gruenspecht said, his 90% confidence interval was $20-$112 and that's not a good investment planning horizon. So once you factor all of those things in, yeah, that would be 0.5—I hate to say a specific number, because it's a range, maybe 0.4 to 0.7 or even—you know broader than that. But that would be—that would be taking all of those factors into account.

GOLODRYGA: Here in the front.

QUESTION: Joan Spero, Columbia University. Could you delve a little bit more deeply on the impact on Russia given everything else that is going on of the lower prices of oil?

GOLODRYGA: Charles, you want to take that one?

COLLYNS: Sure, I mean as you—as you say there's so much going on with Russia, that it's—it's hard to disentangle the different effects. Russia certainly is a country that has lost very substantially in terms of fiscal revenue. On the other hand, revenue—Russia's a country that has been reasonably cautious—reasonable prudent in its fiscal management in recent years, that Russia Finance Ministry had prevented the complete squandering of the—the benefits from higher oil prices and did build up some reserves.

On the other hand of course, Russia is being hurt pretty badly by the implications of the conflict with the Ukraine and the imposition of financial sanctions that's happening—a pretty strong negative impact on—on investment, generating huge capital outflows, putting strains on the banking system. So this is the drop in oil prices, and the collapse of fiscal revenues has certainly done something that makes the Russian situation any easier. And in fact I think there's a non-linearity here. If you add up the implications of one, the sanctions, and two, the oil prices, then the total impact is greater than the sum of the parts, so we have just revised downwards our Russian forecast again. We've been revising our Russian forecast down over the past year pretty consistently, and we're now seeing a pretty severe recession in Russia in 2015.

GOLODRYGA: And yet Putin still has 80% approval ratings. See how long that one will last.

COLLYNS: Somebody else can explain that.

(LAUGHTER)

GOLDRYGA: Any other questions? Let's take one in D.C. I'm sorry, let's take one in DC and then we'll come to you.

QUESTION: Some of you may remember the amusing quote from Zaki Yamani, the former minister of Petroleum of Saudi Arabia, who had the great quote, "The stone age did not end because we ran out of stones. The oil age will not end because we ran out of oil." So any views—anyone willing to go out far enough in their crystal ball to see whether we might not have peak oil, but the peaking of the oil age, and when might that be?

STOCK: Let me respond to that in an indirect way. I think the—the Stone Age ended because higher productivity tools became available.

(LAUGHTER)

STOCK:—at the right price. Here are the challenges for higher productivity tools or for costs. For tools that have—are more cost beneficial from a societal perspective to become available at the right price. So the exigency that we have on the time frame that that question was posed is the one of transitioning not just the transportation sector, but the whole economy to a low carbon—some low carbon future and that goes back to my point which is, that is even more of a challenge at $50 oil and if this persists for quite a few years, it is not just more of a challenge, it is also more urgent.

I think that that's a reason why we need to be taking these policy challenges in the transportation sector especially, particularly—particularly carefully. The policy challenges associated—this is way off track—but the policy challenges associated with greenhouse gas emissions in the utility sector are significant, but in some sense we have the tools and we know how to handle it. And we have technologies, and you can imagine a future, a hard future to get to, but a future. But it's even more challenging in the transportation sector and this only makes the problems bigger.

GOLODRYGA: Does anyone else want to add on? No. Ok. The gentleman here.

QUESTION: (Inaudible), Pace University. My question relates to the inflation rate and what it means for monetary policy emanating from oil prices. If oil prices were to gap down as they did, one would expect the level of the CPI to go down permanently, but not the level of inflation to go down permanently. So would you please explain your logic as it relates to monetary—what the oil price trajectory has done to monetary policy?

STOCK: So I'm really glad you mentioned that point. That's an—that's a really important point, so what you've seen is you've seen a decline in the level of the CPI because of oil prices going down, but then once you've absorbed that—suppose that oil prices just stay where they are. And that gasoline prices just stay where they are. Then that would be 0% inflation and then that 0% inflation would have a moderate downward pull on the rest of the CPI inflation, but you'd see overall headline CPI inflation go right back up to maybe where it was, let's say 1.7%.

So this gets back to the question, the big question is what happened with the pass-through the rest—to the rest of the economy, through the non-oil components to core. And if you look at the bad old days of the 70s and the 80s, there was this spiraling effect where it passed through and it passed through, and you saw further declines that happened over a long dynamic. And that's what you really have to make sure doesn't happen. A key to that is paying attention to inflationary expectations. So far, core has remained relatively stable and you won't see those longer dynamic pass-throughs. So that's—that's really what I had in mind.

COLLYNS: Some questions over here?

GOLODRYGA: We'll go to D.C. We'll come right back to you.

QUESTION: Chris Broughton, Milennium Challenge Corporation. My question is with respect to maritime commerce and global supply chains. We know that about 90% of global commerce is maritime. Talk when oil was above $100 a barrel of companies moving their manufacturing operations from China to the U.S. to take advantage of both lower production costs for shale gas but also because of the high cost of maritime commerce. So have you seen the Baltic Dry Index moving, or do you see that there will be because of low oil prices a resurgence of, a fragmentation, continued fragmentation of global supply chains. Thank you.

COLLYNS: That's a good question, I'm not sure I have a very good answer for you. My—my gut feeling is that the proportion of costs of—of most products represented by transportation is relatively small. So even with a dramatic reduction in the cost of fuel oil, you don't have a major change in the incentives to—to offshore or—or reshore manufacturing activity. But I haven't looked closely at the data and I'm sure there are some sectors where there may be a sufficient shift in the economics that there may be an increased willingness to—to transport products over long distances. If you're looking at bulk products for example, then the economics is different than if you're looking at high value added products. But I suspect the overall impact is quite small.

GOLODRYGA: We'll just volley back and forth between cities. Yes, in the red sweater.

QUESTION: Rachel Robbins. As you mentioned earlier, for many emerging market producers, the higher prices have deterred diversification of their economies. So if oil prices are expected to be low for five, maybe ten years, which of the emerging market producers do you see as being able to make that diversification mix or change and which do you see as not able to make it?

STOCK: Charles, do you want to take that?

COLLYNS: Sure, that's a very good question. I think if you look at the oil exporting countries, you see a spectrum of—of—of economic policy making. A number of countries are already relatively diverse and the reduction in—in opportunities for energy investment will no doubt encourage the rest of the economy to be even stronger. You don't have a Dutch disease effect, so for example, Mexico would be an example of a country where oil exports is—is—is not the dominant source of exports. We've marked down our forecast for Mexico because it now looks like there'll be much less of a—of a huge gain from the—the recent reform program, the opening up of the energy sector to the private sector.

But on the other hand, Mexico, has a—a diverse and dynamic economy, so I'm not too concerned that Mexico's future is fundamentally changed. Saudi Arabia is interesting, but Saudi Arabia is certainly an economy where the government has worked very hard to try to establish a more diverse environment, but has not yet made that much progress. And it would probably take considerably more time before we see a really strong supply response in the non-oil sectors in—in Saudi Arabia, but it—over time, I think it will come because they are building up infrastructure, they're building up education, they're building up technology that will allow them to—to make—to produce a more diversified economy.

And then there are economies that are—are just very poorly run that have not paid much attention to diversification that have continued to be plagued by—by very poor governance, by—by weak infrastructure. I guess Venezuela and—and Russia would be two examples of countries that have certainly—as I said before—squandered the opportunity from the—a bonanza of oil receipts and not used those receipts to strengthen the overall basis of the economy and will therefore—are not in a particularly good position to—to expect the rest of the economy to compensate for a weaker energy sector.

(CROSSTALK)

COLLYNS: A question over on this side?

GOLODRYGA: Sorry, I broke my own rule.

COLLYNS: You broke your rule.

QUESTION: Thank you. Margaret Daly Hayes with Georgetown University. You've addressed a couple of countries of interest explicitly, but I'd like to ask about Brazil and what the impact on the Brazilian oil industry, Petrobras, pre-salt exploration is—and perhaps more importantly on the prospects for continuing growth and poverty reduction in the near and medium term in that country.

COLLYNS: Well, that's a good question and Brazil's a particularly complicated country to—to analyze at this point. Certainly, there's a negative impact on potential for exploitation of the pre-salt sector. I understand that the pre-salt sector will nevertheless be viable at much lower oil prices, but the extent of exploration and production will no doubt be substantially reduced relative to the very bullish expectations that have prevailed the—a couple of years ago. So the boom in—in Brazilian oil will certainly not be as dramatic as had been expected before. And then of course, on top of the drop in the oil price you have the further complication of the Petrobras corruption scandal which is further complicating the potential for Petrobras. But we don't need to get into that.

But, so that's one aspect, but also Brazil as a large oil consumer, as a benefit to Brazil from—from much lower oil prices, it's relieving pressure on the central bank by bringing down inflation on—Brazil's central bank is still in tightening mode, but the degree of tightening that will be needed to bring inflation expectations under control to bring them back within the inflation target is probably going to be less than—than otherwise.

Brazil has also made progress in terms of reducing energy subsidies, they've raised prices, they've taken advantage of lower global prices, too. So there's a fiscal bonus as well, so you get a monetary bonus, you get a fiscal bonus and you get a loss on the production side. So overall, I'm not sure there's a huge net one—one way or the other. But Brazil has many other issues that it needs to grapple with. I don't see the oil prices being the decisive factor here.

GOLODRYGA: We'll come back to New York. Gentleman in the front row.

QUESTION: I'm Khalid Azim, Columbia Business School. In large financial services firms, particularly in the U.S., there's been a scaling down of hydrocarbon trading. What impact if any do you see on - on—on the hydrocarbon market, particularly hedging?

ZANDI: Well I—you know, I don't know that I have much to say about that. I mean I—I think there's been a—for lots of reasons, a decline in liquidity in lots of financial markets. You know some of that related to events in the energy market, commodity market more broadly, a reduction in the interest in investing in commodities. And also in regulatory changes as well, you know, BOCA rule, Dodd-Frank, those kinds of things. So I think if you add it all up, it feels like the markets are less liquid and that there will be greater volatility as a result going forward and just bigger price swings up and down on average. So I think that's the implication and therefore it would raise the cost of trying to hedge your positions and protect yourself from, you know, those moves. So I think it's just going to be more costly going forward.

So I think it—unfortunately, it—it's conflating with lots of other things that are going on in the financial system to reduce liquidity more broadly. And you can feel—lots of different markets, you can feel the loss of that liquidity. And not maybe it's just an adjustment process, you know maybe it takes time for the markets to adjust and other sources of liquidity to enter into the marketplace and so five or ten years down the road it won't make a difference, but at least for the foreseeable future, I think there's—it means less liquidity, more volatility and the higher cost to—to hedging.

GOLODRYGA: Charles, is there another question in D.C.?

COLLYNS: Do we have another question here? Not immediately. There's one, we've got one in the back. Take the opportunity.

QUESTION: Hi. (Inaudible) I have a question about a somewhat different oil producing economy. If you could speak about Norway and the strength of the Kroner and just generally the strength of the Norwegian economy as it results to oil price that would be helpful.

COLLYNS: I'm afraid I don't have very much to say on—on Norway. Norway would fall into the category of a country that has used its oil revenues very well, established a very large well managed sovereign wealth fund. I don't see a major impact on—on Norway's public finances. On the other hand, clearly, there's a reduction in the stream of oil import revenues that could potentially have an impact on—on the exchange rate. But I think the Norwegian economy is sufficiently sound and well managed, that it can manage through this situation without—without a major degree of strain.

GOLODRYGA: Here in New York, here, yes, at the end.

QUESTION: Yes, I'm Jorge Suarez, SP Capital. Consider a scenario for a second where we do have a lot of quantitative easing that's happening in Europe and Japan converting into dollars, speaking of change rates—or exchange gains, let's say. And that we saw the dollar overshooting. In that environment, would you see the possibility of much lower oil prices?

GOLODRYGA: Someone want to take a stab at that?

ZANDI: Well, how much is the dollar going to appreciate in your scenario?

QUESTION: (inaudible) 90 cents per dollar per euro for instance.

ZANDI: Well, it's—it's—I mean it's roughly, the—take the nominal trade weighted dollar, that—that—the—the increase in the nominal trade weighted dollar is a pretty good guestimate of the impact on oil prices. So if we're sitting at, you know—we're sitting at $1.13 on the euro, we go to 90 cents, that's a 20% decline, let's say other currencies don't follow suit to the same—say it's another 10% decline in the nominal trade weighted dollar, I'd say 10% decline in—in global oil prices as a result of that. I think that's a pretty good—you know it's not one for one exactly, but the arithmetic works our pretty closely and I think that's a pretty good proxy for what would happen.

Now, I—I—suppose you have to ask why the euro—is there some other event that caused this to go to 90 cents, is it because Greece looks like it might exit, or whatever it may be. If that's the case, then you might have, you know, other effects, you know that you need to consider in that scenario. But if it's a straight up, you know, we're going to 90 cents on the dollar just because of what the ECB has already done and what the Fed is about to do, then I think, you know, I—that's 10% on global oil prices going to 90—90 cents on the euro.

COLLYNS: Another question here?

QUESTION: Carl Green. We focused a lot on the positive impacts of the lower energy prices. There's been a lot of media chatter about the possible down side coming from financial institutions that have invested heavily in the sector. How significant an effect would that be if they were deleveraged as a result of those investments going sour?

ZANDI: Do you want me to take a crack at that?

GOLODRYGA: Sure.

(CROSSTALK)

(LAUGHTER)

ZANDI: My sense is the financial system is broadly insulated from this—the decline in prices. It'd have to be a pretty further serious decline in price for an extended period of time before it did enough damage I think that it would engulf the financial system into a deeper problem. In large part, because the system is incredibly well capitalized, I mean—if you look at the capital ratios, they are at record highs and they are moving straight up and there's plenty of capital everywhere throughout. In my view, the system, you could—arguably over capitalize. So it can digest a lot.

And if you look at the exposure of the system to the provision of credit to the energy sector, it - you know—we probably don't know the entire extent of it, but it looks—looks roughly—looks manageable to me. So you take the junk corporate bond market, you know roughly at—on the very outside, at previously higher market value—market prices, it was probably 15% of the junk corporate bond market outstanding—15%. That's on the very outside. So that's not inconsequential, it's meaningful, and that's why we've seen spreads gap out in the junk corporate market. But you know I think that's—you know, something that the—the market can digest and the broader financial system can digest.

GOLODRYGA: So if this were ten years ago, you'd be more concerned?

ZANDI: Yeah, I would be because the system—the system—well, I don't know about ten years ago because energy wasn't nearly as important ten years ago. If I go back, if you go back into the 80s, yeah, that's a whole different ballgame, in the 80s. The system was not as well capitalized, it was—it was more byzantine and it was much more dependent on energy, much less so. So I think—it would take a pretty dark scenario—I have a hard time constructing a scenario where the energy sector would take out the financial system. I think that's very unlikely.

GOLODRYGA: That's good to know. Another question here in New York. In the yellow tie, I believe.

QUESTION: Thanks. Bernard Haykel, Princeton University. I want to ask a question about the peg, the dollar peg and the GCC countries and whether you can imagine a scenario where the GCC might abandon the peg, specifically Saudi Arabia?

GOLODRYGA: Charles?

COLLYNS: I'll take that one. I think it's extremely unlikely that Saudi Arabia will abandon the peg. As I said before, Saudi Arabia has very deep reserves. It's not close to—to the sort of stress that we're seeing in countries like Venezuela or—or Russia that have seen very substantial negative impact on reserves and on—on—a downward pressure on the exchange rate. Saudi Arabia has massive exchange reserves and they have plenty of ammunition to sustain the peg for as—as long as they want to.

The Saudi attitude is that the peg exchange rate has been an anchor of stability and expectations of low inflation and I think they would see abandoning the peg as—as a move that would increase the degree of uncertainty and potentially injecting volatility into the market. That's something that they will resist for a long time and they certainly have the resources to make that decision.

GOLODRYGA: Any other questions there in D.C., Charles?

COLLYNS: Yeah, we've got a question here—a question or two here.

QUESTION: John Hauge, (inaudible) Partnership. We haven't discussed much about the alternative energy sources except to say that its development now has become less attractive, and so the U.S. government continue to sponsor its development through subsidies or tax credits, or say that the infant industry has run its course and they're on their own?

GOLODRYGA: Do you want to take that?

STOCK: Sure. I think that it's—it's—it's a hard—it would be a very hard thing to say that somehow we have a clear path in technology whether that's fuel cells or second generation biofuels or electric vehicles—that it's just a matter of now having—having the free market compete with mature technologies. It's so—I think that that's—that's—really not the circumstance that we're in right now. The circumstance that we're in right now is where there's a host of technologies that could be used in the transportation sector that work in the laboratory or maybe work in demonstration levels or work if you're willing to buy Tesla, which would be great, but it's very expensive because of the batteries.

And—and that what's needed is ongoing technological development both at the basic level of R&D and then—and then something that industry does well, which is just the—the—the tuning up of the production process and making—and making tweaks that are going to be constantly moving down a cost curve. I think we're a long ways away from being able to say that industry is able to do that on its own. And so, as a general—as a general matter, there's two sorts of externalities that are not priced in the market. One of them, at least two externalities that are not priced in the market. One of them is just the climate CO2 emissions externality and the other one is a standard one that is true across the board which has to do with investment externalities, investment in basic R&D.

There's a reason that we have the National Institutes of Health, National Institutes of Cancer, National Science Foundation, it's because a lot of the basic R&D in those—in all of those fields across the board, can't be appropriated by private companies and monetized. It just spills over because it becomes public knowledge and it goes into the scientific press, and it's—and it's used—by the scientific journals and it's used by others. And so we're in that same circumstance in transportation.

So I think that by and large there's two types of policies that we need. One is the support through a standard—through a standard fee that—or a standard charge or some—or some mechanism that takes advantage of—or that recognizes that some fuels and technologies are lower carbon than others and then on top of that there's this role for investment that's—especially at the basic research level that can be provided by the federal government that can't be appropriated by the private sector. So that's the long answer, and the short answer is yes.

(LAUGHTER)

GOLODRYGA: Ok. Questions here in New York. Charles?

COLLYNS: I think there's one more question here. Yep?

QUESTION: Hello, Jorge Kamine here in DC. I just was wondering, we didn't talk much about the East Asian economies, and China in particular with—if this will impact their economy and obviously some positive news in Japan.

COLLYNS: Okay, well, China, major oil importer, certainly a substantial benefit to its balance of payments, as the cost of oil imports is reduced. The Chinese have passed on part of the reduction in oil prices to the consumer, but only around half of the reduction in R&D is pretty close in reduction in dollar terms since the R&D is tightly managed against the dollar. But the Chinese oil companies have not passed that reduction on to the consumers taking the benefit on their own P&Ls. So there is some—some boost to—to—to Chinese households from increasing real income from lower prices.

On the other hand though, China faces a whole series of pretty strong headwinds against its economy in the short term as the government grapples with the need to bring down credit growth, the need to shift from an investment-led economy to consumption-led economy, from its anti-corruption drive, from a housing correction, from a fiscal reform—there's a whole bunch of reasons why China's economy has been slowing the past couple of years and—and is expected to continue to slow.

I think the Chinese policymakers have sufficient ammunition to prevent that slow down being too abrupt, but on the other hand, they do—they do understand why they need to make this transition. They're prepared to go to—to—to make that change. They'll take the—there are some benefits as I mentioned from the lower oil price that means they maybe do a little bit less in terms of monetary easing and other short term supports for the economy to help—but I think fundamentally they're still in the—basically in the same situation they were in before, slowing the  economy with a need for—for short term policy support.

Japan also an economy with substantial gains in terms of lower import costs. In Japan, I think there's a—there's a bigger concern about potential impact on inflation expectations. There is a—an effect in China, but China's inflation is—is low, but it's—it's not—it's not a long-term issue in the way it is in Japan. As you know the BOJ's been working very hard in the context of Abenomics to—to reignite inflation expectations and bring inflation back towards 2% long term objective, but the negative impact of lower gasoline prices on—at consumer prices has brought down CPI inflation again and it's making it's—its task more difficult than—than otherwise, it would be.

So the BOJ has had to step up and expand and extend its quantitative easing programs and will probably need to do so again before this year is out. So it certainly complicates the life of the BOJ even though in—in net terms you get a substantial terms of trade gain for Japan.

ZANDI: I think broadly speaking East Asia's the largest beneficiary of the lower global oil prices by—by orders of magnitude. So if you, you know if you look at—so, assume global oil prices average $60 a barrel this year, then global growth, GDP growth will be up by about a half a point and not dissimilar from what we expect in the U.S. and in Europe. But East Asia, I mean, China, Japan, South Korea, you know—India—throw it all in—it's probably close to 0.8-0.9% GDP. That's pretty consequential and a very large boost to that part of the world.

GOLODRYGA: Alright. We'll I think we're just out of time. You guys are pros. No more questions in D.C., Charles?

COLLYNS: I think we're good here.

GOLODRYGA: Ok. We're good here in New York as well. I want to thank my panel for an enlightening conversation. Thank you CFR.

(APPLAUSE)

END

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