-A Tale of Two Different Cases

Transcription

1 The Impact of Higher Oil Prices on the Global Economy -A Tale of Two Different Cases Pingfan Hong Edouard Nsimba Carl Gray Oumar Diallo Project Link Meeting November New York 1

2 Outline 1. Introduction 2. General features of global oil market 3.Literature review 4.Two different cases of higher oil prices 5. Issues in the longer run 6. Policy implications and conclusion 2

3 Two Major Concerns 1. Risk for another global oil crisis, which will dwarf the crises of the 1970s and 1980s 2. A permanently high level of oil prices 3

4 Two Groups of Issues 1. The impact of higher oil prices on the global macroeconomic stability in the short run 2. The implications for the sustainable development in the long run, particularly for developing countries 4

5 General Features of Global Oil Market Low price elasticity of global demand for oil: from to High income elasticity of global demand for oil: from 0.5 to 1.5 Low price elasticity of global oil supply in the short run: around 0 Higher price elasticity of global oil supply in the longer run: from 0.1 to 1.1 5

6 General features of global oil market (continued) Global oil demand is predominately determined by income or global economic activity in general, and it is only marginally influenced by changes in oil prices A small shift in either demand or supply schedule can lead to a large change in oil prices 6

7 Major Findings from Time-series Analysis Non-linear relationship between oil prices and GDP growth Asymmetric: lower oil prices don t help Special events associated with the oil crises in the history were important Changes in the relationship after the 1980s: it becoming less significant 7

8 Major Findings from Time-series Analysis (Continued) A large part of the impact of the oil crises in the history was attributable to central bank s policy response No cointegrating long-run relationship between oil prices and real economic activity In the short run: oil prices (Granger) cause real economic activity 8

9 Limitations of Time-series Analysis Little or no structural interpretation of the coefficients of the closed form Cannot confirm any specific relationship among the variables 9

10 Findings from structural models Channels for macroeconomic impact of higher oil prices: Income transfer Business costs Inflation Financial markets Confidence Policy response International transmission 10

11 Findings from structural models (Continued) Quantitative impact of 20 percent higher oil prices: Global output: -0.3 percentage point Regions: OECD -0.3 Sub-Sahara Africa -1.0 Developing Asia -0.4 Latin America -0.2 Oil exporting countries 5 11

12 Findings from structural models (Continued) Inflation: OECD 0.5 percentage point Developing Countries 0.7 External balance: depending on external financing condition of individual countries Implications for monetary policy: varies from model to model 12

13 Problems with most model-based simulation studies A patent weakness in most studies: ignoring changes in oil volume as a variable in determining the macroeconomic impact of higher oil prices They cannot distinguish a case of demand driven higher oil prices from a case caused by supply curtailment Misleading results: overstate the impact in the case of demand-driven higher oil prices, and underestimate the acuteness in the case of a true oil shock 13

14 Two Different Cases of Higher Oil prices Higher oil prices and higher oil volume: driven by increased global oil demand, an outward shift in demand schedule Higher oil prices and lower oil volume: caused by reduction in oil supply, an inward shift in supply schedule Different macroeconomic implications 14

15 Chart 1. Volume change versus price change of oil ( ) 10 5 DDWOM DP$ 15

16 Exportable Oil importing country T 0 U 0 P 0 Importable (oil) 16

17 Exportable Oil importing country T 0 U 0 U 1 P 1 P 0 Importable (oil) 17

18 Exportable T 1 T 0 U 0 U 1 P 1 P 1 U 1 P 0 Importable (oil) 18

19 Exportable T 0 T 1 U 0 P 1 U 1 P 1 P 0 Importable (oil) 19

20 oil U 0 U 1 I 1 I 0 Consumption of non-oil Figure 3. Welfare loss of higher oil price, with a fixed income 20

21 oil U 2 U 0 U 1 I 2 I 1 I 0 Consumption of non-oil 21

22 Oil U 2 U 0 U 1 I 1 I 0 I2 Non-Oil consumption 22

23 The correct way to simulate the impact of higher oil prices Specify two ex-ante conditions: change in oil prices, and change in oil volume An ideal model should have oil market endogenously built in the system Second best: the model should at least have specified oil as a factor in production function 23

24 The correct way to simulate the impact of higher oil prices (continued) Models with oil as consumption good, or intermediate good, cannot properly reflect the ex-ante change in oil volume, and some approximation should be made 24

25 Oil intensity versus vulnerability to oil shocks Relocation of global manufacturing bases allows developed economies to transfer the adverse impact of higher oil prices to developing countries Lower oil intensity in developed economies means lower sensitivity to higher oil prices driven by higher global demand, but it is NOT equivalent to lower vulnerability to a true oil shock, particularly a large disruption in oil supply 25

26 Global Oil Consumption Million barrels per day s Other EU-15 Emerging Asia Japan Total North America

27 Oil Intensity* In 2002 (OECD=100) OECD Brazil China Africa Thailand India *Primary oil consumption per unit of GDP Source IEA 27

28 Oil consumption per-capita USA Germany Japan Developing Asia s 1980s 1990s

29 Oil issues in the long run Increase in structural demand for oil from developing countries Peak of global oil production Alternative energy sources Implications for developing countries 29

30 Policy implications and conclusion There are two different cases of higher oil prices A case of higher oil prices and higher oil volume is mainly an indication that global growth is at or beyond its potential supported by global oil supply A case of higher oil prices and lower oil volume defines a supply oil shock 30

31 Policy implications and conclusion (continued) Different macroeconomic implications: the former could lead to a mild moderation of the global economic growth, while the latter would have more shock impact Both will have distributional effects, domestically as well as internationally, but the former can imply welfare gains for the world economy as whole, while the latter would entail a net loss. 31

32 Policy implications and conclusion (continued) In either case, the low-income oil-importing countries and the poor within an economy are always the most vulnerable to higher oil prices Even in the case of demand-driven higher oil prices, international competition for oil could still make some poor countries as net losers 32

33 Policy implications and conclusion (continued) No consensus on the role of monetary policy for stabilizing the impact of higher oil prices Externality for national monetary policy facing globally higher oil prices 33

34 Policy implications and conclusion(continued) The most effective policy to stabilize oil prices: reduce and prevent geopolitical uncertainties around global oil supply, invest in oil production, and promote research and development in alternative energy sources Oil volume matters: studies of macroeconomic impact of higher oil prices should take into account the underlying changes in oil volume. 34

35 Define O: volume of oil X: a vector of all other non-oil goods and services Po: price of oil Px: a vector of prices of X P : relative prices between oil and others, Po/ Px P : relative prices of between oil and other productive factors, (Po/ W, Po/R ) L : labour K: Capital W: wage rate R: interest rate Y: output and income d(.): differentiation operator a(.) partial differential operator 35

36 Let U (X, O) be the utility function U (X(Y, P), O(Y, P) ) is the consumer s welfare level in the baseline du = ((au/ ax) (ax/ ap) + ((au/ ao) (ao/ ap)) dp (1) du = ((au/ ax) (ax/ ap) + ((au/ ao) (ao/ ap)) dp + ((au/ ax) (ax/ ay) + ((au/ ao) (ao/ ay)) do (2) 36

37 Let Y = f( K, L, O) be the production Y = f (K(P), L(P), O(P) ) is the level of output in the baseline dy = (( af /ak) (ak /ap) + ( af /al) (al /ap) +( af /ao) (ao /ap)) dp (3) dy = (( af /ak) (ak /ap) + ( af /al) (al /ap) +( af /ao) (ao /ap)) dp +( af /ao) do (4) 37