Lower Oil Prices to Drive Higher Infrastructure Investment
The fall in oil prices over the last seven months has far-reaching implications for the global economy. Some are straightforward, like consumers being able to eat out and shop more because they don’t have to spend as much on gasoline. Others are less direct. For instance, lower oil prices lead to a reduction in government spending on fuel subsidies in countries such as Indonesia and India. Lower prices also provide the opportunity to reduce subsidies without shocking the population. Money that would have been spent on subsidies can be redirected toward investments that boost productivity, a key driver of economic growth.
In India, fuel subsidies have sharply risen as a percentage of government spending over the last five years (Exhibit 1). If oil prices were to average $65 per barrel next year (over 30% above the current market price) the government could save $45 billion in annual spending. Some of this money will almost certainly be earmarked for investment in the country’s highways, railways and ports. Not only are they in dire need of modernization, but better infrastructure is positive for the broader economy as goods can be delivered faster, cheaper and more reliably.
Exhibit 1: Fuel Subsidy as a Percentage of Indian Government Spending
Source: Credit Suisse
Aside from the road, rail and port operators themselves, we expect cement companies and engineering and construction firms to see new orders accelerate. Banks will also benefit as the demand for project financing grows. We often find that it is the second- or third-degree effect of a change that produces the most attractive investment opportunities. While bottom-up stock analysis is the core of our investment process at Driehaus, we believe the strategic integration of macro analysis allows us to have a more nuanced view of the implications of shifts in the global economy.