Corporate Tax Rates and Economic Growth

The Trump administration has declared its intent to lower US corporate tax rates in the hopes of raising GDP growth from the last two years' average of 2.2% to the 3.0% more typical of the US prior to the Great Recession.

Would tax cuts actually produce such a result?   One way to check is by comparing the US to other OECD countries to see if countries with lower tax rates grow faster.

On the graph below, we can see GDP growth rates and corporate tax rates for all OECD member countries, and this indeed does show that growth declines with an increasing tax load. In fact, GDP growth, for a best fit linear trend, declines by 1.3% (pp) for each 10 percentage points increase in the tax rate.  Thus, corporate taxation and growth would appear to be linked.

Corp Tax Rate and GDP All OECD.png

The above graph includes the countries listed below.  Note that a number of countries in the OECD are either small with unique characteristics -- like Luxembourg -- or developing economies like Mexico, Chile, and Turkey.  In this group, even though the US has by far the highest tax rate, its growth is absolutely average.  

All OECD Countries.png

A more reasonable analysis might consider only those countries similar to the US, that is, those advanced wealthy economies listed below.  We would typically consider these to be the US's peer group.  In this cohort. note that the median growth rate is 1.6%, much lower than the US's 2.2%.  At the same time, comparable tax rates average 24%, compared to the US's 35%.  For peer countries, a lower corporate tax rate has not translated into GDP growth superior to that of the US.

Advanced OECD Countries.png

If we regress tax rates against GDP growth, we in fact find that a higher tax rate is associated with a higher rate of GDP growth. But not much higher.  Each 10 percentage points increase in taxation yields a 0.1% (pp) increase in GDP growth.  Effectively nothing, confirmed by an R2 of 0.007.  This leads us to conclude that corporate tax rates and GDP growth in the advanced economies are essentially unrelated.

Corp Tax Rate and GDP Advanced OECD.png

Importantly, among the US peer group, only one country -- Sweden -- has managed above 3% growth in the last two years.  Ten of the sixteen countries in the group could not even break 2% -- and all of them had lower corporate tax rates than the US.  

Using an approach based on international comparisons, we are left to conclude that cutting corporate tax rates is unlikely to raise the US GDP growth rate materially, and highly unlikely to raise it to 3.0%.

Japan's Lost Century

This article was originally published under the title Japan's Demographic Crisis Will Only Get Worse. Here's Why That's Bad News for America in The National Interest.

*****

If you want to see the future of the advanced economies, Japan might be a good place to start.  Despite full employment, Japan is showing muted wage pressures, minimal GDP growth, low interest rates, and continued high government deficits.  How do these seemingly contradictory elements fit together?  Are they unique to Japan, or symptoms of a more general malaise?

In Japan, demographics are largely responsible.  The country is facing an unprecedented meltdown in population.  After peaking in 2010 at 128 million, the country’s population has eased back to 126 million and will continue to decline.  Its population is set to shrink by 0.4% annually, with the decrease expected to accelerate to 1.0% annually by the 2040s.   By 2050, Japan will have 23% fewer citizens.  Not since the great plagues of the Middle Ages have we seen population collapse of this magnitude.  Nor does it stop in mid-century.   Demographers see current trends persisting to the end of the century, when Japan’s population falls to 50 million, only 40% of its all time high.   

Japan's Population 2010-2050 Japan National Institute of Population and Social Security Research

Japan's Population 2010-2050

Japan National Institute of Population and Social Security Research

In the medium term, not all age cohorts are similarly affected.  Japan’s 65+ age group continues to increase, but interestingly, is already almost at steady state.  (The 75+ age group continues to grow until the late 2020s.)   Most affected are the 14-and-under and the 15-65 age groups, the latter here being treated as the potential labor force.   From 2017 to 2050, the 14-and-under age cohort is forecast to fall by nearly 40%.  The workforce (15-65) falls by 34% in the same period.    Thus, not only is Japan’s population declining, its workforce is declining much faster than the population as a whole.

The loss of workers constrains GDP growth.  In essence, the loss of workers offsets productivity gains, such that Japan’s GDP in 2050 will be not materially higher than it is today.  Importantly, worker productivity gains are expected to continue at a reasonable pace, about 1.4% per year.   The average Japanese worker continues to produce more.  That’s not the problem.  The problem is that the number of workers declines by 1.2% on average during the forecast period, with greater declines closer to 2050.   Working smarter is negated by fewer people working. 

Japan Real GDP (2017 = 1.0); Annual Change in GDP / Worker and Working Age Population Source: IPSS, IMF, Prienga analysis

Japan Real GDP (2017 = 1.0); Annual Change in GDP / Worker and Working Age Population

Source: IPSS, IMF, Prienga analysis

Thus, we should expect GDP in Japan in the coming decades to be stagnant, with periods of gains alternating with periods of retrenchment, and no visible trend in either direction – much as we have seen for the last fifteen years or so.  Importantly, a decline in Japan’s GDP cannot be unambiguously interpreted as a cyclical downturn.  It is as likely to be a function of demographics.  The key number to watch will be GDP / worker, which will tell us more about the health of the Japanese economy than will GDP in aggregate.

Japan does have certain hidden reserves.  For example, an increase in senior employment, already high in Japan, would represent a modest hidden reserve of GDP growth.  The employment-to-population ratio could also move up a bit, although this too is fairly high by OECD standards.  Both these factors might make GDP growth a bit better than forecast, but probably not by much.

Demographics are a key driver of the national budget.  Japan has run hefty national budget deficits for the last quarter century.  The country’s working age population peaked in the late 1990s, and has been falling since.  With a decline in its workforce, Japan’s GDP growth also declined, and this appears in turn to have led to lower domestic interest rates.  At the same time, Japan’s elderly population has been soaring.  Given fewer workers, more retirees and lower interest rates, the Japanese government decided to load up on debt as the path of least resistance.  This is no surprise given the politics of the advanced democracies.

Japan National Debt / GDP Ratio, 10 Year Interest Rate, and Annual Change in GDP and Working Age Population Source: IMF, FRED, IPSS, Prienga Analysis and Scenario

Japan National Debt / GDP Ratio, 10 Year Interest Rate, and Annual Change in GDP and Working Age Population

Source: IMF, FRED, IPSS, Prienga Analysis and Scenario

Japan started to run sizeable deficits in 1995, and does to this day.  These cumulated into a national debt exceeding 200% of GDP, which will continue to grow until peaking at 225% of GDP around 2025 in most the scenarios we examined.  To put this in context, the IMF historically considered a debt / GDP ratio of 60% to represent the maximum prudent level.  Japan blew through this limit 20 years ago and continues to be able to operate.  But for how long? 

Without the prospect of meaningful GDP growth, Japan cannot count on continued expansion of the economy to fund a reduction in either absolute or relative debt levels. 

Our analysis suggests that Japan may nevertheless be able to thread the needle.  If real spending per dependent can be held flat in real terms, workers accept on-going tax rate increases, and no internal or external shocks hit the economy, then Japan can muddle through.  This would stabilize debt / GDP above 200%, but not much less than that. 

Neither taxpayers nor spending beneficiaries may be happy with this outcome – or almost any set of policies the Japanese government could conjure.   In the scenario above, real taxes per taxpayer would rise by 80% over the forecast horizon in an economy not growing at all in aggregate.  In addition, the government would have to hold real spending per beneficiary effectively flat for 35 years – and longer, if over-the-horizon projections were to be included.   Will Japanese taxpayers, who are already heavily taxed, accept another 15% rise in tax rates?  And will beneficiaries accept no real increase in benefits for decades?  Will the internal stresses on Japan’s citizens prove manageable, not only for a year or two, but for generations to come?

Moreover, because the workforce is declining, government debt per worker will continue to rise in constant dollars over the forecast horizon, from the equivalent of $50,000 in 2000, to $128,000 this year, and rising to $208,000 in 2050, all in a stagnant economy.  For purposes of comparison, the equivalent in the US today is about $75,000 federal government debt / person of working age, and the US has higher per capita GDP than does Japan.

Japan Index of Real Taxes per Worker and Spending per Government Beneficiary (Youth + Elderly), Pro Rata Government Debt / Working Age Person in Constant 2014 US Dollars Source: IMF, IPSS, Prienga analysis and scenario

Japan Index of Real Taxes per Worker and Spending per Government Beneficiary (Youth + Elderly), Pro Rata Government Debt / Working Age Person in Constant 2014 US Dollars

Source: IMF, IPSS, Prienga analysis and scenario

Even in the best case scenario, the government will require extraordinary and enduring forbearance from the population.  Neither taxpayers nor spending beneficiaries can revolt if the government is to remain fiscally viable.

It is easier to foresee it all going bad.

Any portion of society – either the ‘makers’ or the ‘takers’ – may find the necessary social compact unacceptable, and may turn to a populist leadership offering easy solutions like debt default, money printing, or any variety of destructive policies which look appealing on the surface, but are counter-productive in practice.  Raising tariffs would be an example.

Further, Japan’s economy will be vulnerable to external shocks and global credit conditions.  Japan may find it increasingly difficult to respond to global recessions, major weather events or earthquakes, and any rise in global interest rates.  A one percentage point rise in interest rates would imply an increase in Japan’s government outlays of 2% of GDP (if all debt were re-financed promptly).  Without economic growth as a cushion, the adjustment would have to come in short order from increased taxes or reduced spending.

Japan could also prove vulnerable to international meddling.  Even the cost of a small war could prove too much, and domestic constituents could prove amenable to the blandishments of populists backed by foreign powers trying to destabilize Japanese democracy.

On the other hand, not all trends are negative.  Unemployment should be minimal throughout the period, and wage gains should be solid.  Real estate should be falling in value year after year, increasing the purchasing power of those with jobs.  Moreover, older societies – and by 2050, the average Japanese will be well over 50 years of age – are less amenable to revolutionary promises.  The fervor of impressionable, unemployed youth will be lacking, and this may stabilize Japan’s society and protect it from various forms of domestic extremism and foreign meddling.

At a guess, Japan will go down in a Chinese financial crash sometime before 2025.  China’s debt situation is hardly more enviable than Japan’s, and a corrective meltdown is likely sooner or later.  Japan could easily end up as collateral damage in such a crisis, as banks and investors withdraw from Asia more broadly, much as they did in 1998.  

The implications for the US are myriad.

Over time, Japan’s internal politics may become unstable and more populist.  In addition, Tokyo may find itself in a major fiscal crisis.  And in all certainty, Japan will have fewer resources, both in men and money, to devote to its defense.  In all these cases, Tokyo will be less willing or able to contribute to collective defense with the US, and may as likely require active US support to right its fiscal ship.

Nor is Japan the only country with unfavorable demographics.  Japan’s fertility rate, at 1.4 children per woman, is only slightly below the OECD average of 1.5.  Japan’s problems are unique in their timing and magnitude, in substantial part due to Japan’s reluctance to allow in immigrants.  Most OECD countries, however, are unable to replace their own populations.  South Korea is even worse than Japan, and Germany is no better.  Japan is the canary in the advanced economies’ coal mine.  The difference is simply a matter of time.

Nor is the US immune.  Like Japan, the US now runs structural fiscal deficits, even at the top of the business cycle.  These deficits are coming in higher than forecast, just as America’s 65+ age cohort is set to increase by half to 2025.   The Obamacare repeal and replace dilemma reflects just this tension.   On the one hand, ‘compassionate conservatives’ – and voters – want universal healthcare coverage.  On the other hand, the funding for such coverage is not readily available from tax revenues.  Thus, the US social safety net appears to be at a turning point, with enormous pressures to solve the problem by resorting to ever-increasing debt.  If inflation and interest rates are low, why not borrow more?  That’s what they did in Japan.  Like Japan, the US may find itself in a trap of unrealistic expectations meeting the reality of a thinning workforce and a slow-growing economy.   This is already visible in states like Illinois, New Jersey and Connecticut, which are finding that they are unable to meet the pension promises made in the last thirty years.   Within a decade, these pressures may be manifest on a national level, too.

Since 1980, the elderly have benefitted at the expense of the unborn.  Lives have become longer, healthier and more prosperous, even as education has become unaffordable and families are raising too few children to maintain society’s numbers.  At some point, either the trend line turns, or it doesn’t.  If fertility rates are to be raised to replacement level, the price may well be greater support of families without increasing taxes (which are paid principally by the working parents of families).  Thus, social spending will be redirected from the elderly to the young and unborn at a time of slow economic growth.  Today’s young elderly, those in their fifties, may find a vastly more hostile world when they reach their eighties.

Conversely, society may continue to exist for the living and birth rates may continue to fall back.  The US posted record low fertility this past year, for example.  In such an event, society will continue to consume itself, with each passing generation smaller than the previous – exactly the path demographers have forecast for Japan, and not only until 2050, but until 2100.

In the last twenty years, it has been customary to refer to Japan’s weak economic performance as a 'lost decade'.  Demographics tell us that we are moving well beyond that.  Japan is looking at a lost century. 

It may not be the only advanced economy to suffer such a fate.

US Recession Risk Assessment - Interest Rates

Talk has recently turned to recession in the US.  One indicator used is the differential between 10 year and 2 year government bonds, under the assumption that two year bonds are more sensitive to the business cycle and act as a leading indicator.

So, how do things look?

On the graph below, we can see the 2006 to 2012 period.  In mid-2007, two year rates (green) started to plummet.  By contrast, ten year rates (blue) declined, but more modestly.  By this metric, the 2-10 interest rate differential (gray) gave about six months' notice of a pending recession.

US Ten Year (blue), Two Year (Green) Bond interest rates, and 10-2 Year Differential (gray) Source: US Treasury

US Ten Year (blue), Two Year (Green) Bond interest rates, and 10-2 Year Differential (gray)

Source: US Treasury

How do we look now? 

After 2012, the differential stabilized, but jumped back up to 3% in late 2013 (but no recession), and has since declined in almost secular trend.  At 1.2%, the differential is at it lowest level since early 2008.  In other words, as of the 15th, the differential spoke to the continued consolidation of the economy.  Now, it is true that the short rate has declined by 30 basis points in the last few weeks, but so has the long rate.  Thus, the decline for the moment looks more like overall credit conditions (fear and loathing at the PBoC, in my opinion), rather than specific US cyclical economic factors.

Another Decline: US New Car MPG (January 2016)

US automobile fuel efficiency declined for the fifth time since May, according to a report issued by the University of Michigan’s Transportation Research Institute (UMTRI).

New car fuel efficiency peaked in August 2014 at 25.8 miles per gallon, and has since fallen to 24.9 mpg for December 2015.

During the period of high oil prices, US vehicle mileage was improving as much as 6% per year, and averaging 3-4%.  With the collapse of oil prices last summer, the US consumer now prefers larger cars with more powerful engines, resulting in explicit fuel economy declines.  Mileage is declining at the pace of 0.8% per year. 

We anticipate fuel economy to continue to decline at the pace of about 0.1 mpg per quarter.  Had oil prices remained elevated, new cars would likely have seen a 4% sales-weighted efficiency gain over the last eighteen months.

Weak Brent. Is it supply, or demand?

In this article written for CNBC, I review the Bank of England's oil price model, which suggests that weakness in global demand was responsible for 60% of the decline in oil prices since it's recent peak in 2014.

China has to be the principal source of demand weakness, and that in turn seems to be driven by an over-valued yuan. 

Capital Economics, a consultancy, reports this morning (Dec. 7) that capital outflows from China have increased again, apparently on expectations of pending remnibi devaluation.  If the BoE model and our interpretation is correct, a RMB devaluation should be bullish for oil, perhaps quite bullish.

You can read the full story here:

Why oil could rally big in 2016

 

Fact Checking Mark Carney's Climate Claims

Mark Carney, Governor of the Bank of England, touched off a firestorm of criticism by claiming that catastrophic climate events are in store.  In a speech given to the insurers group, Lloyds, Mr. Carney stated that “the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors”.   The Bank of England apparently feels it can state unequivocally the course of climate events well into the future.

So, let's look at Governor Carney's claims and how they stand up.

Read More

A Eulogy for Shell Alaska

This article originally appeared in the UAE's National newspaper under the title

Shell’s Alaskan oil plan makes long-term sense amid questions over shale’s longevity

******

Shell announced this week that it was abandoning efforts to develop oil from the Alaska’s outer continental shelf (OCS).

The company had drilled a well in the Burger prospect in the Chukchi Sea this past summer, but the results were disappointing. Although the company found hydrocarbons, the flows were insufficient to warrant further exploration. With that, Shell decided to suspend activities in Alaskan waters indefinitely.

Shell had such high hopes. If all went well, it would have produced an average of 650,000 barrels of oil for 35 years from the OCS. From 2025 until 2060, the OCS would power Alaska’s economy and contribute up to 10 per cent of domestic US oil production.

The project, which we estimated would cost more than US$300 billion in total, would have represented the largest infrastructure project in the United States in the next 15 years.

There was no more visionary initiative anywhere in the world.

For Shell, the Alaskan OCS was the third leg in the company’s answer to peak oil. Shell was among the first to recognise in 2005 that increasing oil production would be a heroic undertaking. Finding new oil would be “no cheaper, no easier”, it said.

To meet the challenge, Shell proposed a three-legged strategy. First, a massive gas-to-liquids plant would be constructed in Qatar. And it was. The Pearl GTL plant, as it is called today, came on line in 2011. It produces 8 per cent of Shell’s total output, equalling 260,000 barrels of diesel and lubricants daily.

The second leg of Shell’s strategy rested on a series of liquefied natural gas plants. These plans were essentially scrapped earlier this year when Shell cancelled four LNG projects.

This left the third leg, Alaska, which was perhaps the jewel in the crown. The scale of ambition, the volumes, the duration and the vision were breathtaking. The commitment was enduring. Even when the going got tough, Shell hung in there and continued to fight for Alaska, despite headwinds from regulators, Greenpeace and a series of technical setbacks.

With weak initial well results, however, Shell capitulated and has suspended operations in Alaska “for the foreseeable future”, which should be read as “permanently”.

The vision of oil scarcity that fuelled Shell’s ambitions after 2005 has dissolved, the victim of the shale revolution. As little as two years ago, the promise of shale was uncertain and underestimated (not least by me).

Whereas Shell was prepared to go to the ends of the earth for new oil, company management could have driven a couple of hours from corporate headquarters to a fully plumbed basin – the Permian – and produced more oil with nothing more than fracking and horizontal drilling.

Alaska is redundant under such circumstances. Consequently, until the shale revolution has run its course and oil prices have returned closer to $100 per barrel, expect Shell to keep its distance from Alaska. By the time the dust has settled, the wait could be a decade or more.

And yet I still believe in Shell’s earlier vision. Shale may prove an endless cornucopia of new oil, but maybe not. The oil and gas division of North Dakota’s Department of Mineral Resources has estimated that Bakken shale oil production would only be 35,000 barrels per day higher at the end of 2017 than it is today, even at Brent oil prices above $95 per barrel. Restarting US shale may take much higher prices and much more time than anticipated.

The flood might not last. No one expects shale growth to last past 2025, and many see a peak before 2020. Shell, by contrast, would not have begun flowing oil from Alaska until after 2025.

If we look in decadal terms rather than quarterly, Shell’s visionaries may ultimately be vindicated. Shale, to the best of our knowledge, will not cover us for more than a few more years. In all likelihood, we will need the oil for which Shell is searching in Alaska.

Nor has Shell entirely closed the door. Marvin Odum, Shell’s director of upstream Americas business, has said that Shell “continues to see important exploration potential in [offshore Alaska], and the area is likely to ultimately be of strategic importance to Alaska and the US.”

With oil prices at current levels, however, even three months has become a long time for a company such as Shell. Why was its decision to abandon Alaska announced two days before the end of the quarter? One might speculate that third-quarter financial results would be so disastrous that Shell would want to be able to demonstrate tangible, direct and immediate commitment to reducing expenses and capital expenditures. There is no easier place to cut than Alaska.

Even if everything went well, Shell would not see a dime from Alaska for at least a decade. Terminating Alaska improves the bottom line immediately.

But at what cost? We have allowed the surplus of shale oil to lull us into a false sense of security, that oil has become “cheaper and easier”. And in the short run, it has. But the long run is far from decided.

For now, oil in Alaska is dead. It is dead in Norway and Russia as well. Norway’s Statoil is struggling with costs on its Arctic Johan Castberg project, and Rosneft has conceded that it cannot proceed in Russia’s Kara Sea without its partner ExxonMobil.

Arctic oil, until the shale revolution ends, is in a deep freeze. But this does not mean that we will not need that oil, nor that current oil prices are sustainable.

Rather, the economics of the oil business have become so dire that even the most committed and visionary of companies are forced to abandon their most cherished plans.

China Excess Inventories

In August, China's commercial crude oil and refined products inventories, adjusted seasonally and for demand growth, turned sharply negative. 

Crude oil excess inventories, which stood as high as 20 mb in March, fell to -19 mb in August.  Gasoline inventories, which were 7 mb below normal in January, were 19 mb below normal in August.  Diesel, relegated to the status of an undesired by-product of the refining process, saw excess inventories peak at 20 mb in July, and fall to 12 mb in August (partly due to hefty exports).  Overall crude and product inventories came in 27 mb below seasonal, demand-adjusted averages.

Anyone looking for excess commercial oil inventories will not find them in China.

China Excess Inventories - Aug 2015.png


China Tracker - Sept. 2015

China's economy is both hard to understand and critical in determining the oil price.

As a result, I thought to initiate a China Tracker, which looks at some indicators of China economic performance.

Bottom line: China suffered some sort of adverse economic event starting in Q3 2014.  The evidence suggests this was mostly the side-effects of an over-valued yuan.  However, China's private debt-to-GDP ratio is at a level often associated with financial crises in other countries.

The basic prescription for China would be a simple devaluation to bring the yuan back into line with similar currencies. 

China Tracker Sept. 2015

A Fiscal Policy Rule for Oil Exporters

This article originally appeared in the UAE's National, under the title

The price of oil is tied to government budgets

The graph in the version below is better.

*********

My uncle, a noted macroeconomist, recently asked me if I could suggest a fiscal policy rule for oil exporters to help them planning government spending in the face of volatile oil prices.    

Of course I could.  Here it is.

Oil is the life-blood of the global economy, and therefore GDP and oil prices tend to be related.   Therefore, it seems appropriate to use a model is based on global spend on crude oil as a percent of world GDP.  If oil prices are too low, supply will falter, the global economy will sooner or later become starved of oil, and prices will rise.  On the other hand, if prices are too high, then the consumer economies will stagnate, new oil production will come on line, and oil prices will decline. 

Source: BP Statistical REview, IMF, Prienga estimates and forecasts

Source: BP Statistical REview, IMF, Prienga estimates and forecasts

On the high side, oil spend equaling 5% of GDP implies ‘stagflation’, ‘secular stagnation’ or outright recession in the advanced oil importing countries.  Oil prices are not sustainable at that level without ascribing to some variation of peak oil.  Today, 5% of GDP equals about $110 / barrel.   That’s a very high price historically, and not suitable for fiscal planning purposes given current realities.

On the other hand, oil spend is rarely less than 1.5% of global GDP, which would seem to constitute a planning floor.   This leaves us with a rather unwieldy range of 1.5-5.0% of GDP for fiscal planning purposes.

But we can narrow this range.  Importantly, oil spend rarely falls into the range of 2.5-4.0%.  Only three years in the last 35 saw oil prices in this range.  Why?  We would argue that oil is either supply-constrained or demand-constrained.  If it is supply-constrained, then oil will become a shortage commodity, as we saw from 1979 to 1986 and from 2004 to 2014, and spend will range 4-5% of global GDP.  On the other hand, if the oil supply can respond flexibly to demand, then oil prices will be demand-constrained, implying spend of 1.5-2.5% of GDP, with an average of about 2% of GDP.    There is no middle ground, historically.  Either oil is a shortage commodity, or it is not.

Thus, much depends on one’s view of the future oil supply.  If you believe that oil will remain plentiful, then fiscal policy should assume an oil price equal to 2.0% of global GDP in the long run, perhaps a bit higher in the medium term. 

I would add that our expectations depend heavily on the experience after 1986, when oil prices last collapsed in such great magnitude.    At the time, a period of extended low prices was readily foreseeable.  High oil prices had been maintained by progressive OPEC production cuts, which in turn created global spare capacity equaling 13 mbpd, or 25% of global consumption.   This enormous surplus required almost 20 years to clear—two decades known as The Great Moderation.  However, there is no such surplus today.  Indeed, surplus capacity is probably not more than 1-2% (1-2 mbpd) of oil consumption, a level which would ordinarily be considered critically low.

On the other hand, the world has roughly 300 million barrels of excess oil and product inventories.  Even if drawn at the pace of 1 mbpd, they would last almost a year.  Second, shale oil appears to be a scalable resource, which can be brought back on line quickly if necessary.  If this is true, then a buffer exists—by far not as great as in 1986—but one which might last anywhere from a year through the rest of the decade. 

If one allows the 1986 precedent, then fiscal policy should be set assuming oil prices will equate to 2.3% of GDP, as they did from 1986 to 1990.  In dollar terms, that would imply a spot Brent oil price of $50 / barrel today, rising to $60 / barrel in 2020.  As Brent currently hovers around $48 / barrel, the sustainable price would appear to be above the current price.

On the supply side, maintaining such low prices looks quite a challenge.  At current prices, many shale operators are facing bankruptcy, the oil majors are liquidating themselves, and OPEC governments are suffering for a lack of revenues.  The situation looks untenable for producers.

To maintain low prices, China would have to suffer a recession--GDP growth of 2% or less--thereby pushing its neighbors into outright recession.  The script would follow the Asian financial crisis of 1998.  At the time, oil spend fell to 1.1% of global GDP, equal to $25 / barrel into today’s terms.  Of course, assessing China’s outlook is a complicated matter.  For now, let it suffice to say that maintaining current oil prices depends intrinsically on weakness in China, not on the ability of oil producers to flood the market at $50 / barrel Brent.

Those oil exporters who believe that oil is not a shortage commodity should plan for sustainable prices over the next five years at 2.3% of GDP, approximately $50-60 / barrel on a Brent basis.  For those who believe that China still has a future, and that oil is still hard to find, well, your analysis will be more complicated.