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

[email protected]

Copyright © 2003 Global Insight, Inc.

Copyright © 2004 Global Insight, Inc. 2

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.


A Long View of Real Crude Oil Prices: 1973-85 Was an Exceptional Period

0

20

40

60

80

100

1860 1880 1900 1920 1940 1960 1980 2000

(Real Brent crude in 2003 $/barrel)


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)


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


Attributes of Oil Price Shocks, Continued

• Political environment• Domestic • International

• Oil exporter revenue recycling• Imports• Foreign investment

• G-7 economic policies and responses


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


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


The Global Oil Intensity of GDP Has Decreased 40% Since 1970

0.0

0.3

0.6

0.9

1.2

1.5

1.8

1950 1960 1970 1980 1990 2000 2003

(Oil demand/real GDP, index, 2000=1.0)


Advanced Economies Are Less Vulnerable Today Because of Their Low Oil Intensity

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Canada U.S. Australia Italy Japan France Germany U.K. Switzer-land

(Oil demand as a percentage of GDP, 2003)


High Gasoline Prices Have Curbed Demand Growth in Most Advanced Economies

0.0

0.3

0.6

0.9

1.2

1.5

U.S. Australia Italy Japan France Germany U.K. Switzer-land

(U.S. dollars per liter, 2004)


Asia’s Emerging Markets Are Vulnerable Because of Their High Oil Intensity

0

1

2

3

4

5

6

Thailand Indonesia Philippines India China SouthKorea

Taiwan



Oil Intensity Is High in Other Emerging Markets

0

1

2

3

4

5

6

Brazil Romania Mexico Argentina SouthAfrica

Turkey Israel Poland



Impact of a $10 Rise in Oil Prices on the U.S. Economy in the Global Insight Model

-0.3 -0.6 -0.7-0.4

1.0

0.7

-1.0

-0.5

0.0

0.5

1.0

1.5

Year One Year Two

Real GDP Real Consumption CPI

(Percent deviation from baseline level)


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


Crude Oil Prices in Three Scenarios

(WTI, dollars per barrel)

01020304050607080

2002 2003 2004 2005 2006 2007

Baseline Crisis Crunch


World GDP Growth in Three Scenarios

(Percent change)

1

2

3

4

5

2003 2004 2005 2006

Baseline Crisis Crunch


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.


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.


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.


-3 -2 -1 0 1 2

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


Real GDP Growth: Baseline and Crisis Scenario

0

2

4

6

8

10

NAFTA OtherAmericas

WesternEurope

C. Europe &Balkans

CIS

Baseline Crisis Scenario

(Percent change, 2005)


Real GDP Growth: Baseline and Crisis Scenario

0

2

4

6

8

10

Japan Other Asia &Pacific

Middle East & N. Africa

Sub-SaharanAfrica

World

Baseline Crisis Scenario

(Percent change, 2005)


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.


Thank you!

Visit our web site atwww.globalinsight.com

the global economic impacts of oil price shocks...crisis scenario: below-trend growth • with oil...

Documents