For most of the world, lower oil prices are a good thing. And so it is for companies that have clients there because the world is networked and inter-dependent like never before.
For oil importers, which includes most of the developing world, the recent plunge in the price of oil has come as a stroke of luck. For instance, India subsidizes the price of gasoline and diesel. That resulted in a huge $34 billion bill to the government. Now that oil prices are down, the government has sharply reduced fuel subsidies. Two years ago the same move would have triggered a sharp rise in fuel costs and led to inflation. But this year, the cost of fuel actually came down.
The decision to cut subsidies was so difficult that successive governments failed to implement that, despite trying. Indonesia has done the same thing – it has reduced fuel subsidies to its lowest point ever.
In these countries, inflation is also trending lower than before, and economic growth seems to be returning after a few years of sluggishness. Companies who were wary of expanding in an uncertain environment are feeling more confident. In such geographies, SAP might see more spending by clients, and new companies willing to partner. And as infrastructure improves rapidly, India will close in on China’s growth levels and the market for cloud offerings will expand exponentially. At the same time China’s slowing growth is satisfactory compared with other countries, and will have a positive impact on rest of Asia.
But the situation is different for oil producing countries, who for years have enjoyed times of bounty. Countries such as Qatar and UAE were least affected by the financial crisis as the price of oil was still about $100 a barrel, enough to keep maintain high levels of income. The same was true for Norway and Russia. But now, with oil at around $40 a barrel, these countries which were growing fast have slowed. And here companies might be less willing to spend as much as before. They might hold back until the uncertainty clears.
Then there are countries that are undergoing a difficult cycle. Europe has slowed, and that has less to do with oil and more with the way the economies are structured. Japan is on the balance, and trying to not tip over to a deflationary state. Outside the euro zone, the UK is growing, and that holds hope for others. The International Monetary Fund has made the steepest reduction to its global-growth outlook since January 2012 in a report released yesterday, mainly on account of lower expectations from Europe and Japan. The only exception among advanced economies was the United States. The IMF expects it to continue its current impressive run.
Companies around the world are hoping that a strong U.S. economy will pull the world economy upwards. That will help companies to expand, and start-ups to find funding. And in turn they will need companies such as SAP to be more efficient, and accomplish more with less resources.
Commodity prices might go down further but will eventually rise. The price of oil is expected to recover to $80 a barrel. That is still lower than what OPEC would prefer, but it would allow countries such as Venezuela and Russia to grow at a higher rate. And for large importers such as India and China, this rate won’t put a large burden. As these economies grow, so will companies that require SAP’s expertise to run their crucial operations. More of them will try to expand to multiple geographies, where SAP can help big time. Recently such deals were signed with Etihad and in Russia.
Overall, there is a lot to expect in 2015, and we can hope for better times ahead. There will be challenges, but then SAP has always thrived in such environments. Looking forward to the year ahead!