energy and sustainable development impact of the oil shocks: transmission channels and models for...

ENERGY AND SUSTAINABLE DEVELOPMENTENERGY AND SUSTAINABLE DEVELOPMENT

Impact of the Oil Shocks: Impact of the Oil Shocks: Transmission Channels and Models for Impact Evaluation Transmission Channels and Models for Impact Evaluation

Cristina Mocci Cristina Mocci Italian Ministry of Economy and FinanceItalian Ministry of Economy and Finance

[email protected]@tesoro.it

UNESCOUNESCORome, 2006 4Rome, 2006 4thth December December

Cover

Cristina Mocci – Impact of the Oil Shocks

Impact of Oil ShocksOutline

1. Oil shock’s scenarios

2. Transmission channels and impact on the economic system

3. Models for impact evaluation

4. An example: the Oxford Energy Model (OXEMOD)


Oil shock’s scenarios

Impact of the Oil Shocks (1) – Oil shock’s scenarios Impact of the Oil Shocks (1)


The sources of oil shocksDemand driven shocksDemand grows in markets with a limited oil spare production, transport and refining capacities.As consequence, demand/supply disequilibrium and price pressure

Supply driven shocksReal or potential production losses due to natural disasters, geo-political instability or pressure policies on prices adopted by producers


Determinants of oil scocks

Accelerating Global Demand

Low Non-OPEC Supply Growth

History of Low Investment

OPEC Spare Capacity Reduced

Bottlenecks in Downstream

Impact of shocks magnified in absence of spare capacity

- Geopolitical

- Production losses

- Speculators

Global oil system’s ability to respond to shocks weakened

Accelerated rise in oil prices

Volatility in oil prices

Occasional spikes in oil prices

Determinants of oil shocks


Impact of the Oil Shocks (2)

Transmission channels in the economic system

Impact of the Oil Shocks (2) – Transmission channels in the economic system


Main Direct Effects

Impact on consumer prices, output and government balance (real balance)

Terms-of-trade deterioration among importing and exporting countries


Terms of Trade Losses


Second-round effectsMore costly to reallocate capital or labor between sectors differently affected by oil shocks; aggregate employment and output declining in the short run (allocative effects)

Higher inflation expectations

Investment postponement

Extensive recycling and respending of extra revenues in producer countries


Robustness of Economic Systems

Limiting the inflationary effects of oil price increase avoiding second-round effects and positive expectations on future inflation through credible monetary institutions and suitable policy interventions

Development of lower oil intensive productions

Development, adoption and diffusion of oil efficient technologies

Balance negative effects of oil shocks on terms-of-trade

Robustness of Economic Systems



Models for impact evaluation

Impact of the Oil Shocks (3) – Models for Impact Evaluation


International Forecasting ModelsSpreadsheet model of global oil demand and supply and INTERLINK Model (OECD)

MULTIMOD, GVAR and GEM (IMF)

Oxford World Macroeconomic Model (OEF)

National models


Models’ FeaturesTreatment of a large number of macroeconomic variables and historical dataUtilization of the main achievement of economical theoryTreatment of global economyDevelopment of flexible interface and reporting tool


Models’ Drawbacks

Models ignore the impact on capital asset (stock obsolescence)Models fail to account for the possible impact on consumer and business confidenceRisks of wider difficulties in oil-importing market economies having weak financial situations often under-evaluatedDeterministic nature of models does not allow treatment of uncertainties


Impact of the Oil Shocks (4) – The Oxford Energy Model (OXEMOD)

The Oxford Energy Model (OXEMOD)



OXEMOD-1

OXEMOD permits global economy simulation through different country model structures interacting each other

It combines general equilibrium with dynamic autoregressive models to better fit historical data during transition

It contains an Energy Model


OXEMOD-2Interactions among the macroeconomic system and energy demand, supply and prices are modeledLikely monetary policy reaction to shocks are includedThe most important sources of energy products are endogenous and there are equations which express energy supply produced by OPEC, Eastern Europe, Latin America and the USAThese key variables are linked to oil world demand, prices and investment both in the short – long run


How OXEMOD runs?1. Fuel’s demand is estimated for each country as

function of economic activity and energy prices, so to obtain an initial value for the global demand

2. Unbalances of single fuel demands with respect to global production are estimated taking into account stocks and capacity utilization rate of extraction plants

3. World fuel prices are changed up. Supply/demand balance is achieved through second-round effects on the economic system


OXEMOD Simulations

Three kinds of oil shock’s simulations

1. supply driven

2. demand driven

3. price change


Supply Driven Shocks

A production loss is appliedA larger output from producer countries can compensate the production cut in the limit of available spare capacityStocks limit the impact in the short termPrices rise and push demand down to balance production cut


Demand Driven Shocks

Market demand increases due to economic growth

Spare capacity is used to expand supply

New investments are assumed to favour production rise in the medium term

Prices are adjusted according to production constrains


Price ChangePrice variations are exogeneously applied

In the short run stocks increase to compensate demand fall

OPEC reduces production while non-OPEC producers increase lightly oil supply to balance the market


A Simulation Result

Source: Oxford Economic Forecasting, 2005


Some interesting points• What is the problem ? Lack of refining, transport

infrastructures and production capacity or demand surges of new economies or sudden supply perturbations ?

• What is oil reserve data reliability ?• Are we in the “peak” or in a temporary trouble ?• Is the uncertainty of unforeseenable catastrofic events

counterbalanced by the lower weight of oil in the global economy ?

• Are evaluation models in the context ?• Are oil forecasts more reliable than the haruspex’s

prophecies ?

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