The Global Economic Impacts of Oil Price Shocks...Crisis Scenario: Below-Trend Growth • With oil...
Transcript of The Global Economic Impacts of Oil Price Shocks...Crisis Scenario: Below-Trend Growth • With oil...
The Global Economic Impactsof Oil Price Shocks
Presented to:Project LINK, United Nations
New York, NYNovember 22, 2004
Presented by:Sara Johnson
Managing Director,Global Macroeconomics Group
Copyright © 2003 Global Insight, Inc.
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High Oil Prices Are Here to Stay Awhile
• Rising demand (not supply disruption) is the culprit.
• The world economy is living with the consequences of the collapse in oil exploration and drilling in the late 1990s.
• There is little excess capacity and new investments will not bear fruit for a few years.
• Meanwhile, fears about supply disruptions have added a risk premium to oil prices--the Yukos affair, hurricanes in the Gulf of Mexico, rebel activity in Nigeria, political instability in Venezuela, sabotage in Iraq.
• There is a 10% chance that a major disruption could push prices into the $70-80 per barrel range.
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A Long View of Real Crude Oil Prices: 1973-85 Was an Exceptional Period
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(Real Brent crude in 2003 $/barrel)
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Real U.S. Imported Oil Prices Peaked in 1981
01020304050607080
1970 1975 1980 1985 1990 1995 2000 2005 2010
Nominal Real (2004 dollars)
(Average refiners’ acquisition cost, dollars per barrel)
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Attributes of Oil Price Shocks
• Magnitude of oil price increase
• Primary cause: demand vs. supply
• Oil usage intensity
• Oil import dependence
• Macroeconomic environment• Business cycle maturity, output gap, inflationary
pressures• Asset prices / bubbles• Current account balance, exchange rate stability
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Attributes of Oil Price Shocks, Continued
• Political environment• Domestic • International
• Oil exporter revenue recycling• Imports• Foreign investment
• G-7 economic policies and responses
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The Current Oil Crisis vs. Earlier Ones
• Price increases: smaller• Primary cause: demand growth• Oil usage intensity: substantially lower• Oil import dependence: greater for U.S., Asia• Macroeconomic environment
• Business cycle: expansion less mature, with the global output gap still not closed and inflationary pressures relatively mild
• But there are vulnerabilities: asset bubbles could burst and the U.S. current account deficit could lead to a dollar hard landing
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The Current Oil Crisis vs. Earlier Ones, Continued
• Political environment: less challenging, notwithstanding Iraq and al-Qaeda
• Oil exporter revenue recycling: far more rapid and efficient
• Central banks: more credible and proficient in shaping inflation expectations
• Fiscal situation: large budget deficits providing counter-cyclical stimulus
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The Global Oil Intensity of GDP Has Decreased 40% Since 1970
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1950 1960 1970 1980 1990 2000 2003
(Oil demand/real GDP, index, 2000=1.0)
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Advanced Economies Are Less Vulnerable Today Because of Their Low Oil Intensity
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Canada U.S. Australia Italy Japan France Germany U.K. Switzer-land
(Oil demand as a percentage of GDP, 2003)
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High Gasoline Prices Have Curbed Demand Growth in Most Advanced Economies
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U.S. Australia Italy Japan France Germany U.K. Switzer-land
(U.S. dollars per liter, 2004)
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Asia’s Emerging Markets Are Vulnerable Because of Their High Oil Intensity
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Thailand Indonesia Philippines India China SouthKorea
Taiwan
(Oil demand as a percentage of GDP, 2003)
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Oil Intensity Is High in Other Emerging Markets
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Brazil Romania Mexico Argentina SouthAfrica
Turkey Israel Poland
(Oil demand as a percentage of GDP, 2003)
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Impact of a $10 Rise in Oil Prices on the U.S. Economy in the Global Insight Model
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Real GDP Real Consumption CPI
(Percent deviation from baseline level)
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Oil Price Scenarios
Baseline
• Oil prices average $43 per barrel in 2005 and $36 in 2006
Crisis
• Oil prices spike to $75/bbl for two quarters, then drop to $30
Crunch
• Prices average $50 in 2005, then moderate to $43 in 2006
Crumble
• Oil prices fall quickly to $30/bbl in early 2005 and increase very slowly thereafter
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Crude Oil Prices in Three Scenarios
(WTI, dollars per barrel)
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2002 2003 2004 2005 2006 2007
Baseline Crisis Crunch
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World GDP Growth in Three Scenarios
(Percent change)
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2003 2004 2005 2006
Baseline Crisis Crunch
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Crunch Scenario: Little Damage
• World economic growth is marginally lower.
• Advanced economies’ growth dented by only 0.2-0.3 percentage points in 2005 and 2006, thanks to their low oil intensity and relatively open, flexible markets.
• G-7 inflation is half a percentage point higher for two years. Output gaps and globalization limit pricing power. Credible central banks help to subdue inflationary expectations.
• Oil-importing emerging markets’ growth will be lower and inflation will be higher relative to advanced economies due to their higher oil import dependency.
• Energy-sensitive sectors, which are already hurting from high oil prices, will be squeezed even more.
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Crisis Scenario: Below-Trend Growth
• With oil prices averaging $60 per barrel in 2005, the world’s real GDP will increase just 2.4%, about 0.7 percentage point below trend and well below the baseline forecast of 3.3%.
• Advanced economies will see their growth rates cut to well below potential, but few will experience outright recessions.
• Growth rates in major oil importing countries will be reduced by 1.0 to 2.5 percentage points in 2005.
• In Canada and Mexico, the benefits of higher energy revenues are fully offset by weaker exports to the U.S.
• Economic growth in the Middle East and North Africa is boosted by about two percentage points in 2005, as higher oil revenues enable more expansionary fiscal policies.
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Crisis Scenario: Risk of Deflation
• This time, super-high oil prices are unlikely to generate the stagflation that characterized the 1970s and 1980s.
• Instead, the growth deceleration will put the global economy uncomfortably close to a deflationary quagmire.
• G-7 central banks can cut interest rates (instead of raising them), since oil prices’ deflationary impact on consumer spending will outweigh their inflationary impact.
• Assuming no policy errors, the global economy should bounce back in 2006, given its greater flexibility and openness, and OPEC’s vastly improved ability to spend and invest oil income.
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Russia
United Kingdom
United States
Australia
Eurozone
Japan
India
South Korea
China
(Percent difference from baseline, 2005)
Real GDP Loss or Gain in Crisis Scenario
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Real GDP Growth: Baseline and Crisis Scenario
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WesternEurope
C. Europe &Balkans
CIS
Baseline Crisis Scenario
(Percent change, 2005)
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Real GDP Growth: Baseline and Crisis Scenario
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Middle East & N. Africa
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Baseline Crisis Scenario
(Percent change, 2005)
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Conclusions
• Higher oil prices will not be as problematic for the overall world economy as they were in the past.
• Higher oil prices will certainly depress global growth, but there is little risk of stagflation.
• Excess capacity in many sectors and global competition will keep inflation under control, giving central banks room to maneuver.
• If recent $50-55 oil prices persist, global growth will dip to rates uncomfortably close to its potential growth trend.
• If prices spike to their 1980-81 highs ($70-80/bbl), global economic growth will decelerate to well below potential, coming close to the deflationary danger zone.
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