energy and sustainable development impact of the oil shocks: transmission channels and models for...
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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)
Cristina Mocci – Impact of the Oil Shocks
Oil shock’s scenarios
Impact of the Oil Shocks (1) – Oil shock’s scenarios Impact of the Oil Shocks (1)
Cristina Mocci – Impact of the Oil Shocks
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
Cristina Mocci – Impact of the Oil Shocks
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
Cristina Mocci – Impact of the 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
Cristina Mocci – Impact of the Oil Shocks
Main Direct Effects
Impact on consumer prices, output and government balance (real balance)
Terms-of-trade deterioration among importing and exporting countries
Cristina Mocci – Impact of the Oil Shocks
Terms of Trade Losses
Cristina Mocci – Impact of the Oil Shocks
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
Cristina Mocci – Impact of the Oil Shocks
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
Cristina Mocci – Impact of the Oil Shocks
Impact of the Oil Shocks (3)
Models for impact evaluation
Impact of the Oil Shocks (3) – Models for Impact Evaluation
Cristina Mocci – Impact of the Oil Shocks
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
Cristina Mocci – Impact of the Oil Shocks
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
Cristina Mocci – Impact of the Oil Shocks
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
Cristina Mocci – Impact of the Oil Shocks
Impact of the Oil Shocks (4) – The Oxford Energy Model (OXEMOD)
The Oxford Energy Model (OXEMOD)
Impact of the Oil Shocks (4)
Cristina Mocci – Impact of the Oil Shocks
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
Cristina Mocci – Impact of the Oil Shocks
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
Cristina Mocci – Impact of the Oil Shocks
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
Cristina Mocci – Impact of the Oil Shocks
OXEMOD Simulations
Three kinds of oil shock’s simulations
1. supply driven
2. demand driven
3. price change
Cristina Mocci – Impact of the Oil Shocks
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
Cristina Mocci – Impact of the Oil Shocks
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
Cristina Mocci – Impact of the Oil Shocks
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
Cristina Mocci – Impact of the Oil Shocks
A Simulation Result
Source: Oxford Economic Forecasting, 2005
Cristina Mocci – Impact of the Oil Shocks
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 ?