Petroleum Price Oil and the Economy
The exposure of oil-importing states to higher oil monetary values varies markedly depending on the grade to which they are net importers and the oil strength of their economic systems. Harmonizing to the consequences of a quantitative exercising carried out by the IEA in coaction with the OECD Economics Department and with the aid of the International Monetary Fund Research Department. Euro-zone states, which are extremely dependent on oil imports, suffered the most in the short term, their GDP dropping by 0.5 % and rising prices lifting by 0.5 % in 2007.
The United States suffered the least, with GDP falling by 0.3 % , mostly because autochthonal production meets a bigger portion of its oil demands. Japan’s GDP fell 0.4 % , with its comparatively low oil strength compensating to some extent for its about entire dependance on imported oil. In all OECD parts, these losingss should get down to decrease in the undermentioned three old ages as planetary trade in non-oil goods and services recovers. This analysis assumes changeless exchange rates.
Oil monetary values impact the wellness of the universe economic system. Higher oil monetary values since 1999 – partially the consequence of OPEC supply-management policies – contributed to the planetary economic downswing in 2000-2001 and are stifling the current cyclical upturn. World GDP growing may hold been at least half a per centum point higher in the last two or three old ages had monetary values remained at mid-2001 degrees. Current frights of OPEC supply cuts, political tensenesss in Venezuela and tight stock monetary values have driven up international petroleum oil and merchandise monetary values even further.
The inauspicious economic impact of higher oil monetary values on oil-importing developing states is by and large even more terrible than OECD states. This is because their economic systems are more dependent on imported oil are more energy-intensive, and energy is used less expeditiously. On mean, oil-importing developing states use more than twice the sum of oil to bring forth a unit of economic end product as do OECD states.
Developing states are besides less able to endure the fiscal convulsion wrought by higher oil-import costs. India spent $ 15 billion, tantamount to 3 % of its GDP, on oil imports in 2003. This is 16 % higher than its 2001 oil-import measure. It is estimated that the loss of GDP norms 0.8 % in Asia and 1.6 % in really hapless extremely indebted states in the twelvemonth following. The loss of GDP in the Sub-saharan African states would be more than 3 % .
The impact of higher oil monetary values on economic growing in OPEC states would depend on a assortment of factors, peculiarly how the windfall grosss are spent. In the long term, nevertheless, OPEC oil grosss and GDP are likely to be lower, as higher monetary values would non to the full counterbalance for lower production. In the IEA’s recentWorld Energy Investment Outlook, cumulative OPEC grosss are $ 400 billion lower over the period 2001-2030 under a Restricted Middle East Investment Scenario, in which policies to restrict the growing in production in that part lead to on mean 20 % higher monetary values, compared to the Reference Scenario.
This paper reviews how oil monetary values affect the macro-economy and assesses quantitatively the extent to which the economic systems of OECD and developing states remain vulnerable to a sustained period of higher oil monetary values. It summarizes the findings of a quantitative exercising carried out by the IEA in coaction with the OECD Economics Department and with the aid of the International Monetary Fund ( IMF ) Research Department. That work, which made usage of the large-scale economic theoretical accounts of all three organisations, constitutes the most up-to-date analysis of the impact of higher oil monetary values on the planetary economic system.
Oil monetary values have been crawling higher in recent months: the monetary values of Brent and WTI – the taking benchmark physical petroleum oils. These monetary value additions and the possibility of farther additions in the hereafter have drawn attending once more to the menace they pose to the planetary economic system. The following subdivision describes the general mechanism by which higher oil monetary values affect the planetary economic system. This is followed by a quantitative appraisal of the impact of a sustained rise in the oil monetary value on, foremost, the OECD states and so on the development states and passage economic systems. Finally the net consequence on the planetary economic system is summarized.
Oil Price and the Global Economy
Oil monetary values remain an of import determiner of planetary economic public presentation. Overall, an oil-price addition leads to a transportation of income from importing to exporting states through a displacement in the footings of trade. The magnitude of the direct consequence of a given monetary value addition depends on the portion of the cost of oil in national income, the grade of dependance on imported oil and the ability of end-users to cut down their ingestion and exchange off from oil.
It besides depends on the extent to which gas monetary values rise in response to an oil-price addition, the gas-intensity of the economic system and the impact of higher monetary values on other signifiers of energy that compete with or, in the instance of electricity, are generated from oil and gas. Naturally, the bigger the oil-price addition and the longer higher monetary values are sustained, the bigger the macroeconomic impact.
For net oil-exporting states, a monetary value addition straight increases existent national income through higher export net incomes, though portion of this addition would be subsequently offset by losingss from lower demand for exports by and large due to the economic recession suffered by merchandising spouses.
Adjustment effects, which result from existent pay, monetary value and structural rigidnesss in the economic system, add to the direct income consequence. Higher oil monetary values lead to rising prices increased input costs, reduced non-oil demand and lower investing in net oil importation states. Tax grosss autumn and the budget shortage additions, due to rigidnesss in authorities outgo, which drives involvement rates up.
Because of opposition to existent diminutions in rewards, an oil monetary value addition typically leads to upward force per unit area on nominal pay degrees. Wage pressures together with decreased demand tend to take to higher short term unemployment. These effects are greater the more disconnected and the more pronounced the monetary value addition and are magnified by the impact of higher monetary values on consumer and concern assurance.
An oil-price addition besides changes the balance of trade between states and exchange rates. Net oil-importing states usually see impairment in their balance of payments and seting downward force per unit area on exchange rates. As a consequence, imports become more expensive and exports less valuable, taking to a bead in existent national income. Without a alteration in cardinal bank and authorities pecuniary policies, the dollar may be given to lift as oil-producing countries’ demand for dollar-denominated international modesty assets grow.
The economic and energy-policy response to a combination of higher rising prices, higher unemployment, lower exchange rates and lower existent end product besides affects the overall impact on the economic system over the longer term. Government policy can non extinguish the inauspicious impacts described above but it can minimise them. Similarly, inappropriate policies can decline them.
Excessively contractionary pecuniary and financial policies to incorporate inflationary force per unit areas could worsen the recessive income and unemployment effects. On the other manus, expansionary pecuniary and financial policies may merely detain the autumn in existent income necessitated by the addition in oil monetary values, stoke up inflationary force per unit areas and decline the impact of higher monetary values in the long tally.
Impact on OECD Countries
OECD states remain vulnerable to oil-price additions, despite a bead in the region’s net oil imports and an even more pronounced diminution in oil strength since the first oil daze. Net imports fell by 14 % while the sum of oil the OECD used to bring forth one dollar of existent GDP halved between 1973 and 2006. Nonetheless, the part remains to a great extent dependent on imports to run into its oil demands, amounting to 56 % in 2006. Merely Canada, Denmark, Mexico, Norway and the United Kingdom are presently net exporting states. Oil imports are estimated to hold cost the part as a whole over $ 360 billion in 2006 – equivalent to around 1 % of GDP. The one-year import measure has increased by approximately 30 % since 2005.
Higher oil monetary values have a important inauspicious impact on OECD economic public presentation in the short term in this instance, though their impact in the longer term is more limited ( Table 1 ) . The impact on the rate of GDP growing is felt largely in the first two old ages as the impairment in the footings of trade thrusts down income, which instantly undermines domestic ingestion and investing.
OECD GDP is 0.4 % lower in 2005 and 2006 compared to the base instance. In all OECD parts, these losingss start to decrease in the undermentioned old ages as planetary trade in non-oil goods and services recovers. Throughout the whole five-year projection period, GDP is 0.3 % lower on norm.
The impact of higher oil monetary values on the rate of rising prices is more pronounced. The consumer monetary value index is on mean 0.5 % higher than in the base instance over the five twelvemonth projection period. The impact on the rate of rising prices was felt largely in 2006 – the 2nd twelvemonth of higher monetary values. Recent tendencies show a clear correlativity between oil monetary value motions and short-run alterations in the rising prices rate.
The economic impact of higher oil monetary values varies well across OECD states, mostly harmonizing to the grade to which they are net importers of oil. Euro-zone states, which are extremely dependent on oil imports, suffer most in the short term. GDP losingss in both Europe and Japan would besides worsen budget shortages, which are already big ( close to 3 % on norm in the euro-zone and 7 % in Japan ) . The United States suffers the least, mostly because autochthonal production still meets over 40 % of its oil demands.
The Impact on Developing States
The inauspicious economic impact of higher oil monetary values on oil-importing developing states is by and large more marked than for OECD states. The economic impact on the poorest and most indebted states is most terrible. On the footing of IMF estimations, the decrease in GDP would amount to more than 1.5 % after one twelvemonth in those states.
The Sub-saharan African states within this grouping, with more oil intensive and delicate economic systems, would endure an even bigger loss of GDP, of more than 3 % . As with OECD states, dollar exchange rates are assumed to be the same as in the base instance.
Asia as a whole, which imports the majority of its oil, would see a 0.8 % autumn in economic end product and a one per centum point impairment in its current history balance ( expressed as a portion of GDP ) one twelvemonth after the monetary value addition. Some states would endure much more: the Philippines would lose 1.6 % of its GDP in the twelvemonth following the monetary value addition, and India 1 % . China’s GDP would drop 0.8 % and its current history excess, which amounted to around $ 45 billion in 2006, would worsen by $ 6 billion in the first twelvemonth.
Other Asiatic states would see impairment in their aggregative current history balance of more than $ 8 billion. Asia would besides see the largest addition in rising prices in the first twelvemonth, on the premise that the addition in international oil monetary value would be rapidly passed through into domestic monetary values. The rising prices rate in China and Thailand would increase by about one per centum point in 2007.
Latin America in general would endure less from the addition in oil monetary values than Asia because net oil imports into the part are much smaller. Economic growing in Latin America would be reduced by merely 0.2 per centum points. The GDP of passage economic systems and Africa in sum would increase by 0.2 per centum points, as they are net oil-exporting states.
The economic systems of oil-importing developing states in Asia and Africa would endure most from higher oil monetary values because their economic systems are more dependent on imported oil. In add-on, energy-intensive fabrication by and large accounts for a larger portion of their GDP and energy is used less expeditiously. On norm, oil importing developing states use more than twice the oil to bring forth one unit of economic end product as bash developed states.
The IMF estimates suggest that, in the sustained oil-price addition instance, the net trade balance of OPEC states would better ab initio by about $ 120 billion or about 13 % of GDP, taking history of lower planetary economic growing. Venezuela would derive the least and Iraq and Nigeria the most, reflecting the comparative importance of oil in the economic system. The impact of higher oil monetary values on economic growing in OPEC states would depend on a assortment of factors, peculiarly how the windfall grosss are spent.
In the long term, nevertheless, OPEC oil grosss and GDP are likely to be lower, as higher monetary values would non counterbalance to the full for lower production. Higher oil monetary values in the last four old ages are in portion the consequence of OPEC’s success in implementing its policy of collectively restraining production. This policy has led to a diminution in OPEC’s portion of universe oil production from 40 % in 1999 to 38 % in 2003.
There is a hazard that this policy may be continued in the hereafter, which would restrict the extent to which OPEC manufacturers, notably those in the Middle East, contribute to run intoing lifting universe oil demand. Harmonizing to the IEA’s latest World Energy Outlook, OPEC’s market portion is projected to bounce to 40 % in 2010 and 54 % in 2030.
In the IEA’s recent World Energy Investment Outlook, cumulative OPEC grosss are $ 400 billion lower over the period 2001-2030 under a Restricted Middle East Investment Scenario, in which policies to restrict the growing in production in that part lead to on mean 20 % higher monetary values, compared to the Reference Scenario.
Impact on the Global Economy
The consequences of the sustained higher oil monetary value simulation for both the OECD and non- OECD states suggest that, as has ever been the instance in the yesteryear, the net consequence on the planetary economic system would be negative. That is, the economic stimulation provided by higher oil and gas export net incomes in OPEC and other exporting states would be outweighed by the depressive consequence of higher monetary values on economic activity in the importation states, at least in the first twelvemonth or two following the monetary value rise.
Uniting the consequences of all universe parts yields a net autumn of around 0.5 % in planetary GDP – equivalent to $ 255 billion – in the first twelvemonth of higher monetary values. The loss of GDP would decrease slightly by 2008 as increased demand from oil-exporting states boosts the exports and GDP of oil-importing states.
The chief determiner of the size of the initial net loss of planetary GDP is how OPEC and other oil-exporting states spend their windfall oil grosss. The greater the fringy leaning of oil-producing states to salvage those grosss, the greater the initial loss of GDP. Both the IMF and OECD simulations assume that oil exporters would pass around 75 % of their extra grosss on imported goods and services within three old ages, which is in line with historical norms.
However, this premise may be excessively high, given the current province of financial balances and external militias in many oil-exporting states. In pattern, those states might take advantage of a crisp monetary value addition now to reconstruct militias and cut down foreign and domestic debt. In this instance, the inauspicious impact of higher monetary values on planetary economic growing would be more terrible.
Higher oil monetary values, by impacting economic activity, corporate net incomes and rising prices, would besides hold major deductions for fiscal markets – notably equity values, exchange rates and authorities funding – even, as assumed here, if there are no alterations in pecuniary policies:
- International capital market ratings of equity and debt in oil-importing states would be revised downwards and those in oil-exporting states upwards. To the extent that the creditworthiness of some importation states that are already running big current history shortages is called into inquiry, there would be upward force per unit area on involvement rates. Tighter pecuniary policies to incorporate rising prices would add to this force per unit area.
- Currencies would set to alterations in trade balances. Higher oil monetary values would take to a rise in the value of the US dollar, to the extent that oil exporters invest portion of their windfall net incomes in US dollar dominated assets and that minutess demand for dollars, in which oil is priced, additions. A stronger dollar would raise the cost of serving the external debt of oil-importing developing states, as that debt is normally denominated in dollars, worsening the economic harm caused by higher oil monetary values. It would besides magnify the impact of higher oil monetary values in forcing up the oil-import measure at least in the short-run, given the comparatively low price-elasticity of oil demand. Past oil dazes provoked debt-management crisis in many developing states.
- Fiscal instabilities in oil-importing states caused by lower income would be exacerbated in those developing states, like India and Indonesia that continue to supply direct subsidies on oil merchandises to protect hapless families and domestic industry. The load of subsidies tends to turn as international monetary values rise, adding to the force per unit area on authorities budgets and increasing political and societal tensenesss.
It is of import to bear in head the restrictions of the simulations reported on above. In peculiar, the consequences do non take into history the secondary effects of higher oil monetary values on consumer and concern assurance or possible alterations in financial and pecuniary policies. The loss of concern and consumer assurance ensuing from an oil daze could take to important displacements in degrees and forms of investing, nest eggs and disbursement. A loss of assurance and inappropriate policy responses, particularly in the oil-importing states, could magnify the economic effects in the average term.
In add-on, neither the OECD’s estimations for member states nor the IMF’s estimations for the development states and passage economic systems take expressed history of the direct impact of higher oil monetary values on natural gas monetary values and the secondary impact on electricity monetary values, other than through the general rate of rising prices. Higher oil monetary values would doubtless drive up the monetary values of other fuels, amplifying the overall macroeconomic impact.
Rising gas usage worldwide will increase this impact. Nor does this analysis take into history the macroeconomic harm caused by more volatile oil monetary values. Short-run monetary value volatility, which has worsened in recent old ages, complicates economic direction and reduces the efficiency of capital allotment. Despite these factors, the consequences of the analysis presented here give an order-of-magnitude indicant of the likely minimal economic reverberations of a sustained period of higher oil monetary values.
Oil monetary values remain a important macroeconomic variable. Higher monetary values can still bring down significant harm on the economic systems of oil-importing states and on the planetary economic system as a whole. The rush in monetary values in 1999-2000 contributed to the lag in planetary economic activity, international trade and investing in 2000- 2001.
The dissatisfactory gait of recovery since so is at least partially due to lifting oil monetary values: harmonizing to the mold consequences, planetary GDP growing may hold been at least half a per centum point higher in the last two or three old ages had monetary values remained at mid-2001 degrees.
The consequences of the simulations presented in this paper suggest that farther additions in oil monetary values sustained over the average term would sabotage significantly the chances for continued planetary economic recovery. Oil importing developing states would by and large endure the most as their economic systems are more oil-intensive and less able to endure the fiscal convulsion wrought by higher oil-import costs.
The general economic background to the current runup in monetary values is significantly different to old oil-price dazes, all of which coincided with an economic roar when economic systems were already overheating. Monetary values are now lifting in a state of affairs of probationary economic resurgence, extra capacity and low rising prices. Firms are less able to go through through higher energy-input costs in higher monetary values of goods and services because of strong competition in wholesale and retail markets. As a consequence, higher oil monetary values have so far scoured net incomes more than they have pushed up rising prices.
The consumer monetary value index growing has fallen in about every OECD state in the past twelvemonth, from 2.3 % to 2.0 % in the Euro zone and 2.4 % to 1.9 % in the United States in the 12 months to December 2003. Deflation in Japan has worsened from -0.3 % to – 0.4 % over the same period. A weaker dollar since 2002 has besides offset partially the impact of higher oil monetary values in many states, particularly in the euro-zone and Japan.
The squeezing on net incomes delayed the recovery in concern investing and employment, which began in earnest in 2003 in many parts of the universe. In contrast to old oil dazes, the fiscal governments in many states have so far been able to keep down involvement rates without put on the lining an inflationary spiral.
Yet the economic menaces posed by higher oil monetary values remain existent. Fears of OPEC supply cuts, political tensenesss in Venezuela and tight stocks have late driven up international petroleum oil and merchandise monetary values even further. Current market conditions are more unstable than normal, in portion because of geopolitical uncertainnesss and because tight merchandise markets – notably for gasolene in the United States – are reenforcing upward force per unit areas on petroleum monetary values.
The hiking of hereafters monetary values during the past several months implies that recent oil monetary value rises could be sustained. If that is the instance, the macroeconomic effects for importing states could be painful, particularly in position of the terrible budget-deficit jobs being experienced in all OECD parts and pig-headedly high degrees of unemployment in many states. Fiscal instabilities would decline, force per unit area to raise involvement rates would turn and the current resurgence in concern and consumer assurance would be cut short, endangering the lastingness of the current cyclical economic upturn.
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