Barron’s, May 14, 2016

Low oil prices are obviously bad for some emerging markets, such as Russia and Brazil. But they should be good for most of them, including India and China. Crude exporters represent just 20% of the global MSCI Emerging Markets Index, says Marcus Svedberg, chief economist at East Capital in Stockholm.

Markets have ignored this logic, however. Emerging market indexes have plummeted since the great oil crash began in mid-2014, and only started to recover as crude prices rebounded recently. Analysts who waited on an oil dividend for the developing world are giving up hope. “If you haven’t seen it for more than 20 months, you probably won’t see it now,” says John Baffes, who oversees the World Bank’s commodities forecasting. Here’s why:

• Oil just isn’t what it used to be. The World Bank predicted last year that cheaper crude would add 0.7% to 0.8% to global gross-domestic-product growth. But the bank’s analysts based that on data from the price shocks of the 1970s, Baffes admits. Economies, developed and developing, are much less dependent on oil now, and so the bump in GDP growth didn’t occur.

• The world has bigger headaches. Vertiginous leverage in the energy sector is one. Slowing growth in China is another. Both threaten to set off a fresh round of global-banking and/or bond-market instability, whose effects would be amplified in emerging markets. The U.S. dollar, which has climbed nearly 20% against a world currency basket since oil tanked, is the mother of all headaches, devaluing emerging market equities and sucking capital back to the U.S.

• Limited impact on consumers. Less spending on gasoline does not translate to more spending elsewhere for most of the world. Many governments heavily subsidized fuel costs, so they have pocketed the windfall while keeping pump prices unchanged. “In the U.S., the consumer gets 90 cents if the oil price falls by a dollar. In other countries, they get a few cents,” says Nathan Griffiths, emerging market equities portfolio manager at NNIP.

• Force of habit. Emerging markets have more or less tracked oil and commodities prices for the past 15 years, Svedberg says. Investors are used to the correlation, despite shifting fundamentals. Even though the 2014-15 oil implosion was driven mostly by oversupply, markets react to prices as a barometer of demand, and investors look to limit their portfolio risk when prices fall.

THE MOST TANGIBLE BENEFIT from cheap oil may come at the dinner table, since fuel represents up to 20% of the cost of basic grains. Corn futures have fallen by a quarter since the 2014 crude collapse. That helps emerging market consumers and their governments as inflation falls, allowing interest-rate cuts.

Over time, economists hope the oil crash will spur reform. Major importers like India and Indonesia are using the price respite to cut energy subsidies, easing fiscal strains and market distortions. Big exporters are making needed tactical changes—such as Russia’s letting the ruble float rather than burning reserves to support it—and talking about strategic shifts. Among the latter is Saudi Arabia’s Vision 2030 program, which aims to invest trillions in economic diversification.

These positives might eventually trickle through to financial markets. An ideal oil price balancing exporters’ and importers’ interests in emerging markets might be $70-$80, says Raghu Suryanarayanan, executive director of research at MSCI. (Brent crude was trading at about $47 last Thursday.) But stability is more important than price. “Even at current levels, you will start to see some improvement if there is no uptick in systemic risk,” he says. A big if.