Monday, April 1, 2019

Economics Essays Petroleum Price Oil Economy

Economics Essays fossil vegetable embrocate Price Oil EconomyPetroleum Price Oil and the EconomySummaryThe vulnerability of rock naive- merchandise countries to high anele colour values varies markedly depending on the degree to which they argon profits importers and the oil impregnation of their economies. According to the results of a quantitative exercise carried come out by the IEA in collaboration with the OECD Economics De opusment and with the assistance of the international M iodi terminateary gunstock Research Department. Euro- district countries, which be super dependent on oil imports, suffered the approximately in the compact condition, their gross home(prenominal) product roveping by 0.5% and inflation wage step-up by 0.5% in 2007.The United States suffered the least, with gross municipalated product come backing by 0.3%, by and large beca do natal occupation meets a bigger shargon of its oil needs. lacquers gross domestic product fell 0.4% , with its carnal knowledgely low oil force compensating to some extremity for its al to the highest degree total dependency on import oil. In whole OECD theatrical roles, these eviles should start to diminish in the hobby three stratums as spherical trade in non-oil goods and go rec overs. This analysis assumes constant commute rates.Oil wrongs impact the health of the domain miserliness. Higher oil hurts since 1999 partially the result of OPEC supply-management policies contributed to the global scotch downswing in 2000-2001 and ar dampening the current cyclical upturn. World gross domestic product underdeveloped may have been at least half a parting point high(prenominal)(prenominal)(prenominal) in the last two or three grades had bells remained at mid-2001 levels. Current fears of OPEC supply burns, political tensions in Venezuela and tight stock wrongs have wedgen up international rocky oil and product prices even hike up.The adverse stinting i mpact of high oil prices on oil-importing get upth countries is generally even much utter(a) than OECD countries. This is beca design their economies are more than dependent on trade oil are more cypher-intensive, and susceptibility is utilized slight efficiently. On just, oil-importing developing countries use more than twice the amount of oil to produce a whole of frugal output as do OECD countries.Developing countries are to a fault less able to weather the financial turmoil wrought by higher oil-import apostrophizes. India spent $15 toolion, resembling to 3% of its GDP, on oil imports in 2003. This is 16% higher than its 2001 oil-import bill. It is estimated that the deprivation of GDP intermediates 0.8% in Asia and 1.6% in very suffering highly indebted countries in the year following. The loss of GDP in the Sub-Saharan Afri ordure countries would be more than 3%.The impact of higher oil prices on economic addition in OPEC countries would depend on a bo d of factors, particularly how the bonanza revenues are spent. In the immense term, however, OPEC oil revenues and GDP are likely to be lower, as higher prices would not fully liquidate for lower production. In the IEAs recent World Energy investing Outlook, cumulative OPEC revenues are $400 billion lower over the current 2001-2030 under a Restricted Middle East Investment Scenario, in which policies to limit the growth in production in that region tow to on average 20% higher prices, compared to the Reference Scenario.IntroductionThis paper reviews how oil prices go the macro-economy and assesses quantitatively the extent to which the economies of OECD and developing countries remain vulnerable to a continue period of higher oil prices. It summarizes the findings of a quantitative exercise carried out by the IEA in collaboration with the OECD Economics Department and with the assistance of the world-wide Monetary Fund (IMF) Research Department. That work, which made use of the large-scale economic models of all three organizations, constitutes the most up-to-date analysis of the impact of higher oil prices on the global economy.Oil prices have been creeping higher in recent months the prices of Brent and WTI the winding benchmark physical rough-cut oils. These price increases and the possibility of further increases in the future have gaunt attention again to the threat they pose to the global economy. The next region describes the general mechanism by which higher oil prices affect the global economy. This is followed by a quantitative assessment of the impact of a continue coat in the oil price on, first, the OECD countries and then on the developing countries and transition economies. Finally the net effect on the global economy is summarized.Oil Price and the Global EconomyOil prices remain an big determinant of global economic performance. Overall, an oil-price increase leads to a transfer of income from importing to exporting countries through a shift in the terms of trade. The magnitude of the direct effect of a apt(p) price increase depends on the share of the cost of oil in national income, the degree of dependence on imported oil and the ability of end-users to reduce their consumption and substitution away from oil.It to a fault depends on the extent to which gas prices rise in response to an oil-price increase, the gas-intensity of the economy and the impact of higher prices on former(a) forms of energy that compete with or, in the case of electricity, are generated from oil and gas. Naturally, the bigger the oil-price increase and the longer higher prices are preserve, the bigger the macroeconomic impact.For net oil-exporting countries, a price increase directly increases sincere national income through higher export earnings, though part of this gain would be later delete by losses from lower demand for exports generally due to the economic recession suffered by trading partners.Adjustment effects, which result from real wage, price and structural rigidities in the economy, add to the direct income effect. Higher oil prices lead to inflation increased input costs, decreased non-oil demand and lower enthronisation in net oil importing countries. Tax revenues fall and the compute deficit increases, due to rigidities in government expenditure, which drives interest rates up.Because of electric resistance to real declines in wages, an oil price increase typically leads to upward coerce on nominal wage levels. Wage pressures together with reduced demand tend to lead to higher piffling term unemployment. These effects are greater the more abrupt and the more pronounced the price increase and are magnified by the impact of higher prices on consumer and occupation confidence.An oil-price increase also changes the dimension of trade amidst countries and exchange rates. Net oil-importing countries normally invite deterioration in their balance of payments and put downward pr essure on exchange rates. As a result, imports find more expensive and exports less valuable, leading to a drop in real national income. Without a change in central deposit and government monetary policies, the dollar may tend to rise as oil-producing countries demand for dollar-denominated international reserve assets grow.The economic and energy-policy response to a confederacy of higher inflation, higher unemployment, lower exchange rates and lower real output also affects the overall impact on the economy over the longer term. Government policy cannot eliminate the adverse impacts described higher up but it can minimize them. Similarly, inappropriate policies can worsen them. overly contractionary monetary and fiscal policies to contain inflationary pressures could exacerbate the recessionary income and unemployment effects. On the other hand, expansionary monetary and fiscal policies may simply delay the fall in real income necessitated by the increase in oil prices, tend up inflationary pressures and worsen the impact of higher prices in the long run.Impact on OECD CountriesOECD countries remain vulnerable to oil-price increases, despite a drop in the regions net oil imports and an even more marked decline in oil intensity since the first oil shock. Net imports fell by 14% while the amount of oil the OECD used to produce one dollar of real GDP halved between 1973 and 2006. Nonetheless, the region remains heavily dependent on imports to meet its oil needs, amounting to 56% in 2006. Only Canada, Denmark, Mexico, Norway and the United Kingdom are presently net exporting countries. Oil imports are estimated to have cost the region as a whole over $360 billion in 2006 equivalent to around 1% of GDP. The annual import bill has increased by about 30 % since 2005.Higher oil prices have a evidential adverse impact on OECD economic performance in the short term in this case, though their impact in the longer term is more limited (Table 1). The impact on th e rate of GDP growth is felt broadly in the first two years as the deterioration in the terms of trade drives down income, which immediately corrupts domestic consumption and investment.OECD GDP is 0.4% lower in 2005 and 2006 compared to the base case. In all OECD regions, these losses start to diminish in the following years as global trade in non-oil goods and services recovers. Throughout the whole five-year gibbousness period, GDP is 0.3% lower on average.The impact of higher oil prices on the rate of inflation is more marked. The consumer price index is on average 0.5% higher than in the base case over the five year projection period. The impact on the rate of inflation was felt mostly in 2006 the second year of higher prices. Recent trends show a clear correlation between oil price movements and short-term changes in the inflation rate.The economic impact of higher oil prices varies considerably across OECD countries, largely according to the degree to which they are net importers of oil. Euro-zone countries, which are highly dependent on oil imports, suffer most in the short term. GDP losses in both Europe and japan would also exacerbate budget deficits, which are already large (close to 3% on average in the euro-zone and 7% in Japan). The United States suffers the least, largely because indigenous production still meets over 40% of its oil needs.The Impact on Developing CountriesThe adverse economic impact of higher oil prices on oil-importing developing countries is generally more pronounced than for OECD countries. The economic impact on the poorest and most indebted countries is most gross(a). On the basis of IMF estimates, the reduction in GDP would amount to more than 1.5% after one year in those countries.The Sub-Saharan African countries within this grouping, with more oil intensive and sparse economies, would suffer an even bigger loss of GDP, of more than 3%. As with OECD countries, dollar exchange rates are assumed to be the correspon ding as in the base case.Asia as a whole, which imports the bulk of its oil, would experience a 0.8% fall in economic output and a one piece point deterioration in its current estimate balance (expressed as a share of GDP) one year after the price increase. Some countries would suffer much more the Philippines would lose 1.6% of its GDP in the year following the price increase, and India 1%. chinas GDP would drop 0.8% and its current account surplus, which amounted to around $45 billion in 2006, would decline by $6 billion in the first year. early(a) Asian countries would see deterioration in their aggregate current account balance of more than $8 billion. Asia would also experience the largest increase in inflation in the first year, on the assumption that the increase in international oil price would be quickly implemented through into domestic prices. The inflation rate in China and Thailand would increase by almost one percentage point in 2007.Latin America in general would suffer less from the increase in oil prices than Asia because net oil imports into the region are much smaller. Economic growth in Latin America would be reduced by only 0.2 percentage points. The GDP of transition economies and Africa in aggregate would increase by 0.2 percentage points, as they are net oil-exporting countries.The economies of oil-importing developing countries in Asia and Africa would suffer most from higher oil prices because their economies are more dependent on imported oil. In addition, energy-intensive manufacturing generally accounts for a larger share of their GDP and energy is used less efficiently. On average, oil importing developing countries use more than twice the oil to produce one unit of economic output as do developed countries.The IMF estimates suggest that, in the sustained oil-price increase case, the net trade balance of OPEC countries would improve signly by about $120 billion or around 13% of GDP, taking account of lower global economic gr owth. Venezuela would gain the least and Iraq and Nigeria the most, reflecting the relative importance of oil in the economy. The impact of higher oil prices on economic growth in OPEC countries would depend on a variety of factors, particularly how the windfall revenues are spent.In the long term, however, OPEC oil revenues and GDP are likely to be lower, as higher prices would not compensate fully for lower production. Higher oil prices in the last quadruple years are in part the result of OPECs winner in implementing its policy of collectively constraining production. This policy has led to a decline in OPECs share of dry land oil production from 40% in 1999 to 38% in 2003.There is a endangerment that this policy may be continued in the future, which would limit the extent to which OPEC producers, notably those in the Middle East, contribute to meeting rising world oil demand. According to the IEAs latest World Energy Outlook, OPECs market share is projected to rebound to 40% in 2010 and 54% in 2030.In the IEAs recent World Energy Investment Outlook, cumulative OPEC revenues are $400 billion lower over the period 2001-2030 under a Restricted Middle East Investment Scenario, in which policies to limit the growth in production in that region lead to on average 20% higher prices, compared to the Reference Scenario.Impact on the Global EconomyThe results of the sustained higher oil price semblance for both the OECD and non- OECD countries suggest that, as has always been the case in the past, the net effect on the global economy would be negative. That is, the economic excitant provided by higher oil and gas export earnings in OPEC and other exporting countries would be outweighed by the depressive effect of higher prices on economic activity in the importing countries, at least in the first year or two following the price rise. have the results of all world regions yields a net fall of around 0.5% in global GDP equivalent to $ 255 billion in the first y ear of higher prices. The loss of GDP would diminish somewhat by 2008 as increased demand from oil-exporting countries boosts the exports and GDP of oil-importing countries.The main determinant of the size of the initial net loss of global GDP is how OPEC and other oil-exporting countries spend their windfall oil revenues. The greater the marginal propensity of oil-producing countries to save those revenues, the greater the initial loss of GDP. Both the IMF and OECD simulations assume that oil exporters would spend around 75% of their additional revenues on imported goods and services within three years, which is in line with historical averages.However, this assumption may be too high, given the current state of fiscal balances and external reserves in more oil-exporting countries. In practice, those countries might tax return advantage of a sharp price increase now to rebuild reserves and reduce foreign and domestic debt. In this case, the adverse impact of higher prices on glob al economic growth would be more severe.Higher oil prices, by bear upon economic activity, corporate earnings and inflation, would also have major implications for financial markets notably equity values, exchange rates and government financing even, as assumed here, if there are no changes in monetary policiesInternational expectant market valuations of equity and debt in oil-importing countries would be revised downward and those in oil-exporting countries upwards. To the extent that the creditworthiness of some importing countries that are already speed large current account deficits is called into question, there would be upward pressure on interest rates. Tighter monetary policies to contain inflation would add to this pressure.Currencies would adapt to changes in trade balances. Higher oil prices would lead to a rise in the value of the US dollar, to the extent that oil exporters invest part of their windfall earnings in US dollar dominated assets and that transactions demand for dollars, in which oil is priced, increases. A steadyer dollar would raise the cost of servicing the external debt of oil-importing developing countries, as that debt is usually denominated in dollars, exasperate the economic damage caused by higher oil prices. It would also make up the impact of higher oil prices in pushing up the oil-import bill at least in the short-term, given the relatively low price-elasticity of oil demand. Past oil shocks provoked debt-management crisis in some(prenominal) developing countries. pecuniary imbalances in oil-importing countries caused by lower income would be exacerbated in those developing countries, like India and Indonesia that continue to provide direct subsidies on oil products to protect poor house nurtures and domestic industry. The burden of subsidies tends to grow as international prices rise, adding to the pressure on government budgets and increasing political and social tensions.It is important to bear in mind the li mitations of the simulations reported on above. In particular, the results do not scan into account the secondary effects of higher oil prices on consumer and business confidence or possible changes in fiscal and monetary policies. The loss of business and consumer confidence resulting from an oil shock could lead to significant shifts in levels and patterns of investment, savings and spending. A loss of confidence and inappropriate policy responses, particularly in the oil-importing countries, could amplify the economic effects in the medium term.In addition, neither the OECDs estimates for member countries nor the IMFs estimates for the developing countries and transition economies take explicit account of the direct impact of higher oil prices on natural gas prices and the secondary impact on electricity prices, other than through the general rate of inflation. Higher oil prices would undoubtedly drive up the prices of other fuels, magnifying the overall macroeconomic impact.Ri sing gas use worldwide will increase this impact. Nor does this analysis take into account the macroeconomic damage caused by more volatile oil prices. Short-term price volatility, which has worsened in recent years, complicates economic management and reduces the efficiency of capital allocation. Despite these factors, the results of the analysis presented here give an order-of-magnitude indication of the likely lower limit economic repercussions of a sustained period of higher oil prices. demonstrationOil prices remain a significant macroeconomic variable. Higher prices can still inflict substantial damage on the economies of oil-importing countries and on the global economy as a whole. The surge in prices in 1999-2000 contributed to the slowdown in global economic activity, international trade and investment in 2000- 2001.The disappointing pace of recovery since then is at least partly due to rising oil prices according to the modeling results, global GDP growth may have been at least half a percentage point higher in the last two or three years had prices remained at mid-2001 levels.The results of the simulations presented in this paper suggest that further increases in oil prices sustained over the medium term would undermine significantly the prospects for continued global economic recovery. Oil importing developing countries would generally suffer the most as their economies are more oil-intensive and less able to weather the financial turmoil wrought by higher oil-import costs.The general economic background to the current run-up in prices is significantly different to previous oil-price shocks, all of which coincided with an economic boom when economies were already overheating. Prices are now rising in a situation of tentative economic revival, excess capacity and low inflation. Firms are less able to pass through higher energy-input costs in higher prices of goods and services because of strong competition in wholesale and retail markets. As a res ult, higher oil prices have so far eroded profits more than they have pushed up inflation.The consumer price index growth has fallen in almost every OECD country in the past year, 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 also subdivision partly the impact of higher oil prices in many countries, oddly in the euro-zone and Japan.The squeeze on profits delayed the recovery in business investment and employment, which began in earnest in 2003 in many parts of the world. In contrast to previous oil shocks, the financial regimen in many countries have so far been able to hold down interest rates without risking an inflationary spiral.Yet the economic threats represent by higher oil prices remain real. Fears of OPEC supply cuts, political tensions in Venezuela and tight stocks have recently driven up international e arthy oil and product prices even further. Current market conditions are more unstable than normal, in part because of geopolitical uncertainties and because tight product markets notably for gasoline in the United States are reinforcing upward pressures on crude prices.The hike of futures prices during the past several months implies that recent oil price rises could be sustained. If that is the case, the macroeconomic consequences for importing countries could be painful, especially in view of the severe budget-deficit problems being experienced in all OECD regions and stubbornly high levels of unemployment in many countries. Fiscal imbalances would worsen, pressure to raise interest rates would grow and the current revival in business and consumer confidence would be cut short, threatening the durability of the current cyclical economic upturn.ReferencesEichengreen, B., Y. Rhee and H. Tong (2004), The Impact of China on the Exports of Other Asian Countries, NBER Working Paper n o.10768 (September).Frankel, J. and D. (1999), Does Trade crusade Growth? American Economic Review 89, pp. 379-399.Grubert, H. and J. Mutti (1991), Taxes, Tariffs and Transfer Pricing in Multinational Corporate Decision-Making, Review of Economics and Statistics 73, pp.285-293.Ianchovichina, E. and W. Martin (2005), Trade Impacts of Chinas WTO Accession, this volume.Lian, D. (2005), Singapores Lessons for China, Morgan Stanley Global Economic Forum (5 May), np.Mody, A., A. Razin and E. Sadka (2002), The Role of tuition in Driving FDI Theory and Evidence, NBER Working Paper no. 9255 (October).Ravenhill, J. (2005), why the East Asian Auto Industry is not Regional, unpublished manuscript, Australian National University.

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