Brent, the euro and Spanish GDP

The recent collapse in the price of Brent petroleum, although partly neutralized by the fall in the euro/dollar exchange rate, presupposes an externally generated boost to economic activity in Spain. its impact will be felt in (among others) household consumption, the relative weight of imports and business input costs. Assuming, for the sake of argument, that the current 40 per cent annual decline in the Brent euro price sticks for the whole of 2015 (and keeping in mind that taxes are on volume consumed rather than price paid, preventing at least a quarter of the price drop from reaching the end user), we’ve made a few calculations as to the potential economic impact.

The chart on the left shows the typical breakdown of Spanish household expenses. Fuel costs represent five per cent of family spending. Assuming that consumers will spend about 90 per cent of their petroleum-related savings and that the products purchased will be less import intensive than, say, auto diesel or gasoline*, our estimation is that the effect could be as large as positive 0.5 per cent on nominal GDP.

Keep in mind that downstream effects of variations in the price of crude, such as on electricity prices, are not considered in this figure. Nor is there any allowance made for changes in refinery margins.

In terms of the total economy, adding the effect of the lowering of energy input costs for all sectors to the above calculation, a direct GDP increment of 0.9 per cent is well within the range of the possible.

*In 2009, imports weighed a full 69 per cent of the total value of fuel consumption. Ex-petroleum, imported inputs to consumed goods and services  counted for a mere 8 per cent.

Javier García Echegaray, with contributions from Charles Butler and José Domingo Rosello.