Suddenly the world is awash with oil. A surprise surge in production and weaker than expected global demand for crude have sent oil reserves soaring and prices tumbling. The 40pc drop in the oil price to around $60 a barrel since June is by far the biggest shock for the global economy this year.

Similar episodes in the past tell us the consequences are likely to be both profound and long lasting. Normally, economists would add ‘positive’ to this list, but doubts are surfacing as never before.

The scale of the current oil shock is difficult to exaggerate. While financial markets and commentators were obsessed by rising geopolitical tensions and the latest twists in central banks’ policies in the US, Europe and Japan, even larger forces in oil markets went largely unnoticed. As late as October, a ‘key concern’ of the IMF was the risk of an oil price spike caused by geopolitical tensions. Instead, rising production and weaker demand growth have left suppliers competing to find willing customers.

Rich country stocks of crude oil have defied the onset of the northern hemisphere winter and risen to their highest level in two years, according to the International Energy Agency. West Texas Intermediate crude oil prices dropped from more than $100 a barrel in June to less than $60, with the European Brent oil prices following the same downward path. Even a slight uptick last week cannot disguise the downward trajectory of the price.

Rather than geopolitical tensions in Ukraine and Iraq causing an oil shortage and price spike, as foreseen in the IMF scenario, the causality is flowing from economics to politics. The plunge in oil prices now threatens Russia’s living standards and public finances to the point where it will start 2015 as a devalued and belligerent nation with nuclear weapons. In the Middle East, the funds to finance vicious conflicts in Iraq and Syria face greater pressures, which promise to stretch all sides. And the US is less likely to want to play global policeman now that it can satisfy almost 90pc of its energy needs from domestic sources, up from 70pc as recently as 2005.

In normal times, the broad effects of the oil price drop on the global economy are well known. It should act as an international stimulus that will nevertheless redistribute heavily from oil producing countries to consumers and the longer the new prices endure, the more profound will be the effects on the structure of industries across the world.

But this time, economists are actively debating whether the world has changed and other moving parts - such as falling inflation levels and the strong dollar - will throw sand into the works of the usual economic relationships.

When oil prices fall, there is no iron law that it enhances global economic growth. The main effect is a huge redistribution from oil producers, who receive less for the effort of extracting the black gold, to consumers who benefit from cheaper transportation and energy, enabling them to spend more money on other goods and services or to save their windfall.

A 40pc fall in the industry benchmark would normally act as a powerful economic fillip but there are signs that the recent decline might not deliver the expected boost to the global economy

Most economists still agree with Christine Lagarde, IMF managing director, who this month said that “it is good news for the global economy”. The positive effect on growth should arise because oil consumers tend to spend more of their gains than oil producers cut their consumption.

Global impact: Gabriel Sterne of Oxford Economics explains, “producers have financial surpluses and don’t tend to cut back, while lower prices redistribute income to those who have a higher propensity to consume and to invest”. The scale of the global effect is significant. Oxford Economics estimates that every $20 fall in the oil price increases global growth by 0.4pc within two to three years. The IMF’s core simulations suggest a similar size of the effect, so the $40 reduction in price would more than offset the total 0.5 percentage point downgrades to the IMF’s world economic growth forecasts for 2014 to 2016 over the past year. That boost is then amplified if it generates a subsequent lift in confidence, encouraging companies to invest and spend.

If the usual effect on the world economy is large, it is always dwarfed by the swings that will benefit some countries and hit others. The big winners will be countries that are simultaneously heavy users of energy and largely dependent on oil imports. Moody’s, the credit rating agency, calculates that countries “battling high inflation and large oil subsidy bills, such as Indonesia and India, will benefit most from a lower price environment”.

Looking at 45 different economies, Oxford Economics agrees that emerging economy oil importers are likely to be the main winners. Most advanced economies also gain significantly, although as they have less dependence on oil for every dollar of gross domestic product so their proportionate gains are smaller. A further boon for many emerging economies is that the fall in prices allows countries to cut fuel subsidies, removing significant pressure from the public finances. Lord Stern of the London School of Economics says “this is exactly the right moment to remove fossil fuel subsidies and intensify carbon pricing”.

For oil exporters, however, the outlook is darker. Those which have tended to spend rather than save oil revenues have the least capacity to adjust to the new reality. Moody’s estimates that Russia and Venezuela will be hardest hit, since they have “large recurring expenditure that may be politically challenging to cut”. The largest oil producer, Saudi Arabia, has much greater fiscal buffers since it saved more than it spent. Currency markets have already reacted brutally to those countries it considers vulnerable, pushing down the rouble 40pc against the dollar over the past six months, for example.

So far, so normal. But this time there are more voices than usual suggesting expectations of a global boost are deceptive. Stephen King, chief economist of HSBC, believes lacklustre demand in China, Japan and Europe over the summer was the primary cause of the collapse in prices so the traditional ‘lower oil prices good: higher oil prices bad’ story is ‘no longer so obviously true’.

He argues that optimism following an oil price fall in economic estimations is based on positive supply-side developments for the western developed world, but “there are plenty of situations where falling oil prices are merely symptoms of a wider malaise”.

Deflation fears: Mr King argues that much of the past gains from oil prices have come from lower interest rates associated with falling inflation, which cannot happen when monetary policy is already stimulating economies as hard as it can. If households in China, Europe and Japan feel there are reasons to save any windfalls they receive, the global demand boost will be severely restricted.

And one reason consumers might be less willing to open their purses and wallets this time is that a spectre of low inflation stalks many advanced economies. While stable or falling prices make people better off, they also potentially threaten a prolonged period of stasis if households prefer to ‘wait and see’ before spending their money.

That attitude, encouraged by the possibility of lower prices tomorrow could encourage companies to delay investment and households to put off consumption, generating a self-fulfilling prophesy of soggy growth and gently falling prices.

The threat is not to be dismissed lightly. Oxford Economies estimates that with an oil price of $60 a barrel, 13 European countries will see their inflation rates fall below zero, at least temporarily, in 2015.

Aware of the danger that oil could create persistent disappointment rather than a shot in the arm, Peter Praet, chief economist of the European Central Bank, said monetary policy in Europe did not have the normal luxury of simply assuming lower oil prices would boost incomes and spending this time. “In these conditions monetary policy needs to react,” he said.

Other reasons why an anticipated boost to demand might be more muted include the sharply rising dollar, which ensures that domestic oil prices outside the US have not fallen by anything like the 40pc headline figure.

Though a global boost is more likely now than it was, there is no guarantee cheap oil will cast the magic spell this time that it always has in the past.

Published in Dawn, Economic & Business, December 22th , 2014