Book Launch Alejandro Werner Roberto Cardarelli Lusine Lusinyan Western Hemisphere Department - IMF May 1, 216 Wilson Center Washington, D.C.
An unconventional energy boom in North America started in mid-2s Crude Oil and Natural Gas Produced in North America (Percent of total world production) North America: Oil Trade Deficit (Percent of GDP) 3 25 215 25 215 2 22 24 26 28 21 212 214 216 2 25-1 North America Proj. (WEO) 15 1 5-2 United States Crude oil Natural gas -3 Background
though with major differences across the countries in the region Production of Crude Oil and Liquid Fuels (Million barrels per day) Production of Natural Gas (Trillion cubic feet) 16 3 United States 12 8 United States Proj. (EIA) 25 2 15 Proj. (EIA/NEB) 4 Canada Mexico 2 22 24 26 28 21 212 214 216 1 5 Mexico Canada 2 22 24 26 28 21 212 214 216 Background
A new scenario since mid-214: energy prices plunged, investment collapsed Crude Oil and Natural Gas Spot Prices (US$/barrel, left scale; US$/million btu, right scale) Energy Investment in Canada and the United States (Oil/gas extraction/mining/machinery/support activities) 14 12 1 WTI 16 12 6 2 Proj. 3 2 1 8 6 8-2 -1 4 4 2 Henry Hub (rhs) 2 22 24 26 28 21 212 214 216-6 -1 Annual change, bln US$ Y/Y percent change (rhs) 27 28 29 21 211 212 213 214 215 216-2 -3-4 Background
and forecasts of energy production in the region have (generally) been revised downward Crude Oil Production Forecast Vintages (Million barrels per day) United States Canada Mexico 12 1 8 7 6 5 213NEB 216NEB 3. 214 215 216 Actual 6 4 2 213AEO 214AEO 215AEO 216STEO 4 3 2.5 21 215 22 225 23 235 24 2 25 21 215 22 225 23 235 24 2. 212 214 216 218 22 Sources: U.S. EIA Annual Energy Outlooks and Short-term Energy Outlook. Canada s National Energy Board; Pemex, Financial Ministry of Mexico, and IMF staff projections. Background
But the potential for the region remains intact IEA216: Oil Production (Percent of total world supply)* IEA215: Natural Gas Production (Percent of total world supply) 25 Mexico Canada United States 3 Mexico Canada United States 2 2.7 2.4 25 1.3 1.1 4.6 4.5 15 4.5 5.1 2 15 1 5 13.4 14.2 1 5 2.6 21.3 215 216 217 218 219 22 221 214 216 218 22 * Assumes a post-sanctions increase for Iran in 216 and adjusts for OPEC capacity changes thereafter. Background
Power Play: three main themes Macroeconomic impact of greater energy production in the United States, Canada, and Mexico (reforms) A sectoral view: what is the energymanufacturing nexus in the three countries? A North American perspective: regional or global integration? Main themes
United States: higher energy production has modest effect on economic activity The overall impact on the U.S. GDP is not very large (1 1½ percent in the long run) Energy sector accounts for a small share of the economy The dollar appreciation limits the positive impact Consumption and investment increase, but only gradually as households and firms learn about the increase in wealth and reduction of costs Does not capture non-linear impact of much stronger decline in energy prices US: Macro impact
U.S. manufacturing: limited spillovers from energy 12 11 1 9 Payrolls: Private Industries (Millions) Manufacturing (rhs) 2 18 16 Rebound in U.S. manufacturing after the global financial crisis 8 7 6 5 11 1 Industrial Production: Manufacturing (Index, 27=1) 9 8 7 25 27 29 211 213 215 Total, excl. manufacturing 1979 1983 1988 1992 1997 21 26 21 215 JPN CAN GBR USA 14 12 1 While lower energy prices help manufacturing, they are less important than competitive exchange rate and labor costs Result still holds when accounting for the direct impact on manufacturing (using I-O linkages) US: Energy-manufacturing nexus
Canada: energy boom may hurt manufacturing but still positive for economy High commodity prices and strong REER in the 2s explain most of the loss in Canada s market share of U.S. manufacturing imports 3 25 2 15 1 5 Market Share of U.S. Manufacturing Imports (Percent) China Mexico Canada 1997 1999 21 23 25 27 29 211 213 215 But the unconventional energy boom had significant positive spillovers to the rest of the economy 8 6 4 2-2 Output in Energy and Related Industries (Percent change 27 13) Unconventional oil extraction Conventional oil & gas extraction Oil & gas extraction All industries Engineering & other construction activities Natural gas distribution Crude oil & Architectural, other pipeline engineering & related services Canada: Energy-manufacturing nexus
Canada: improving energy infrastructure is key to fully benefit from energy Two scenarios: Full market access (no infrastructure constraints) Canada GDP up 2 percent relative to baseline Segmented market (oil and gas infrastructure bottlenecks persist) Canada GDP down ½ percent 25 2 15 1 5 6 4 2-2 -4 Global Market Scenario (Percent deviation from baseline) Energy production Real GDP (rhs) 212 214 216 218 22 222 Segmented Market Scenario (Percent deviation from baseline) Energy production Real GDP (rhs) 3. 2. 1.. 1..5. -.5-6 212 214 216 218 22 222-1. Canada: Macro impact
Mexico: energy reform can improve output in the long run Significant reform effort in 213 14 opens up the energy sector Potential production gains of up to 5 percent in the long run Reform vs. no-change: Macro impact Mexico GDP up 3½ 4 percent in the long run Does not cover other channels of reform, especially electricity and natural gas pipeline capacity Mexico: Macro impact
and boost Mexico s manufacturing sector Scope to reduce electricity generation costs Important macro impact Fuel substitution manufacturing output up 1½ 3½ percent Convergence to U.S. levels manufacturing output up 5 15 percent Greater impact if include labor demand/supply reaction 25 2 15 1 5.25.2.15.1.5. Average Retail Price of Electricity (US$ cents per kilowatt hour; 213) Mexico Industrial United States Commercial Manufacturing Output Response to 1 Percent Shock to Electricity Prices (Percent cumulative, with 9 percent CI) 1 2 3 4 5 Years Mexico: Energy-manufacturing nexus
A North American perspective: a few questions on energy integration Scope for more regional integration (e.g., infrastructure, regulations), but also trends toward stronger global integration (e.g., U.S. oil exports) Which form of integration would (most) benefit individual countries? How would these benefits be distributed? What would be the impact on national manufacturing sectors? A North American perspective
Regional integration should not come at the cost of less global integration Two stylized integration scenarios Pursuing more integration only at the regional level (keeping barriers to rest of the world) means lower energy prices and greater market shares for North America s manufacturing This seems to be important only for Mexico, but there is no clear advantage for the U.S. and Canada (Percent deviation from low production scenario in the long term) Real GDP Consumption Equivalent Global integration scenario Canada.4.3 Mexico 4.5 6.7 United States 1.2 2.2 North American integration scenario Canada.3.4 Mexico 4.8 7.5 United States 1.2 2.1 A North American perspective
Greater collaboration for more efficient development, trade, and use of energy Dialogue and energy information sharing Assessment of infrastructure opportunities and needs Common standards for safety, security, and environment Supporting technology and innovation Joint effort to combat climate change A North American perspective
Thank you Disclaimer: The views expressed are those of the authors and do not necessarily represent the views of the International Monetary Fund, its Executive Board, or its management.