Oil Price Impacts

8/4/2019 Oil Price Impacts

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Policy Study on Impacts of Rising OilPrices on the Poor and Implicationsfor the MDGs

Presented to:

UNDP Technical Review Committee

23-24 March 2006, BangkokRekha Krishnan & Team

TERI


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Study Objectives Assess overall economic and social impacts of oil price increases on

developing countries of the region, and their specific impacts on thepoors access to modern energy services.

Assess impacts on key economic and social sectors, e.g., agriculture,

transport, industry (especially SMEs), commerce, physicalinfrastructure, health and education.

Assess impacts on various components of MDGs and relate theoutcomes to progress made towards meeting the MDGs.

Assess effectiveness of energy strategies, policies and mechanisms toenhance the poors access to modern energy services against oilprice increases and continued volatility in global markets.

Identify strategic directions and policy options for regionalgovernments to cope with future oil price uncertainties, with specialreference to options to safeguard the interests of the poor.


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Coverage of Interim Reports Global assessment

overall macro-economic impacts at international

level based on secondary data Regional assessment

region-specific impacts, accounting for sub-regional diversities, based on secondary data

National assessmentmacro level assessment based on secondary data,combined with micro level survey of poorcommunities in 2 villages in India


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Key Findings of Global Assessment:

Highlights of recent oil price trends Rise in prices, though persistent, has been relatively gradual in

comparison to some previous spikes.

In real terms, current oil prices are still below the all-time highs

reached in 1979. Recent rise in prices due to a combination of strong demand

against tight supply and rising marginal costs less rather than aconsequence of supply disruptions as such.

Oil price rise coincides with a period of dollar instability.

Marked growth in demand for transportation fuels gasolineand diesel.


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Average nominal oil prices: 1990-2005

0.00

10.00

20.00

30.00

40.00

50.00

60.00

1990

1992

1994

1996

1998

2000

2002

2004

average

ofBrent,WTIand

OPEC

basket($/barrel)

Average of NominalPrices of Brent, WTI andOPEC Basket ($ perbarrel)


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Key Findings of Global Assessment:Nominal and Inflation-Adjusted Monthly

Oil Prices: 1946-2005

Source: Financial Trend Forecaster, 2006


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Key Findings of Global Assessment:Major factors underlying oil price

increases Substantial growth in world oil demand concentrated in Asian

developing countries, particularly China, and the United States.

Declining excess supply capacity, oil companies rationalization and

cost-cutting efforts, and concentration of excess capacity in a fewcountries leading to increased vulnerability of world oil market.

Unstable Middle-East situation and oil supply insecurity elsewhere inRussia, Nigeria and Mexican Gulf coast

Low levels of investment in exploration in Mexico and OECD Europe.

Inflow of speculative money and risk premiums emergence whichmay have caused excessive price hikes.

Underinvestment in the sector, particularly in exploration.

Environmental regulations resulting in reduced capacity tomanufacture transportation fuels, such as gasoline, diesel and jet fuel.


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Key Findings of Global Assessment:Potential macro-economic impacts based

on past experience Contraction of economic output 0.25 to 0.50% per $10/barrel of increase in

oil prices.

Rise in cost of production of goods and services, depending on oil intensity ofsectors/activities.

Trade deficits due to higher cost of exports. Higher general price levels/inflation, with possible wage-price spirals as

experienced during first oil price shocks of 1970s.

Unemployment triggered by cost-cutting measures by manufacturers/serviceproviders.

Volatility in equity and bond valuations, and in currency exchange rates due tochanges in economic activity, corporate earnings, inflation and monetarypolicy.

Incentives for energy suppliers to increase production (to the extent there isscope for it) and investment, including investment in non-oil energy options.

Reduction in oil demand where prices are passed through to consumers.


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Key Findings of Global Assessment:Actual macro-economic impacts observed

so far

Decline in world GDP growth by about 0.7% during 2004-2005,when oil prices rose steeply.

Stable aggregate consumer price indices for developing anddeveloped nations.

Consistent decline in oil intensity of GDP irrespective of oil pricetrends.

No marked change in per capita oil consumption.


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Reasons for lack of dramatic impacts Oil price rise coincides with economic revival and low inflation

where firms and governments are less able to pass on higherenergy costs to prices of goods and services because of strongcompetition and consumer pressures.

Rapid economic growth in some developing countries, notablyChina and India.

Weakening of US$ since 2002, partly offsetting impact of higheroil prices in many countries, especially in the Euro zone andJapan.

Relatively low interest rates, though this trend is beingreversed.

Question of time-lag, depending on how sustained oil pricetrends will be.


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Outlook for future Up till 2010, oil markets may remain broadly balanced, with

incremental oil demand being met mostly by higher non-OPECproduction.

However, prospects for higher spare capacity are unfavourable, so

market will likely remain tight and vulnerable to risk of large,unexpected price changes.

From 2010 onward, OPEC supply may increase significantly as non-OPEC production peaks while global demand continues to rise.However, there would be growing upside risks to prices due to:o strong demand side pressures from Asian countries, particularly

China,o continued tightness in North American gasoline marketso political instability, especially in the Middle Easto long lead times and high costs of establishing new refining

capacity

o underinvestment in supply infrastructure in various countries.


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Key Findings of Regional Assessment:

Macroeconomic impacts of oil price rise Real GDP growth: Asian sub-regions not adversely impacted so far due

to economic revival in OECD economies which has spurred demand forAsian exports. GDP growth flat in Pacific Island Countries since 1990.

Inflation: No significant inflationary impact so far in South-East Asia,average inflation rates in North-East Asia and Mekong, moderateincrease in South and West Asia since 2000. Relatively low inflationaryimpacts linked to moderate pass-through in most economies withadministered prices for petroleum products. Pacific Island Countries withmarket-determined pricing report increases in inflation, particularlytransportation costs.

Foreign exchange reserves: Increase in all sub-regions since 2001,faster than growth in current account surplus due to capital inflows intothe region.

Trade balance: No major adverse impact in Asia sub-regions.Significant negative impact in Pacific Island Countries.


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Economic profiles of sub-regions North-East Asia and Mekong

- Relatively health GDP growth rates- High inflation in Lao PDR, followed by Mongolia and Vietnam- Low openness of Cambodia and Lao PDR economies

- Chinas high foreign exchange reserves South-East Asia

- Negative GDP growth in Timor Lese- High inflation in Myanmar- Stable GDP growth and control over inflation in Malaysia and Thailand- High trade deficit of Philippines

South and West Asia

- Healthy GDP growth rates in all countries- High inflation in Iran and Sri Lanka- Indias high foreign exchange reserves

Pacific Island Countries- High dependence on imports- Narrow range of exports, dependence on tourism- Fiji and Papua New Guinea with greatest diversity of economic activities- Overall, low dependence on/potential for domestic growth


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Energy profiles of sub-regions North-East Asia and Mekong

All economies, except Vietnam, are oil importers. Cambodia and LaoPDR are heavily dependent on traditional fuels.

South-East Asia

Malaysia is the only net oil exporter, with Indonesias status reversed in2004. Energy use patterns differ significantly between nations withMyanmar using the least energy per capita and largely dependent ontraditional fuels.

South and West AsiaAll economies, except Iran, are net oil importers. Afghanistan, Bhutan,Maldives, Nepal and Sri Lanka do not produce any oil. Bhutan, Nepal

and Bangladesh have high dependence on traditional fuels. Pacific Island Countries

None of the economies, except Papua New Guinea, produce oil.Considerable interest in renewable energy sources, though overallshares in energy supplies remain low.


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Overall Conclusions of Global and

Regional Assessments Eventual impacts of oil price likely to affect oil-

importing developing countries most severely

Countries with weak policy frameworks, low foreign

exchange reserves and limited access to internationalcapital markets will be worst-affected

Policy action favouring price pass-through (subsidyremoval) needed to trigger demand side responses

Technological responses will be crucial e.g., newtransport infrastructure, non-conventional oilproduction, renewable energy, efficient energyproduction/use processes/equipment


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Key Findings of National Assessment:India: Macroeconomic impacts of oil pricerise

No decline in consumption of crude and petroleum products. No impact on GDP, including agricultural and industrial GDP. Only a modes impact on Inflation, partly due to partial pass-through of

oil price increases to consumers and partly due to low weightage given

to petroleum products in consumer price index. Increase in trade deficit. No effect on public spending on physical infrastructure and social

sectors (education, health and poverty alleviation). Increase in public spending on renewable energy development. Electricity pricing unlikely to be impacted since only 10% of electricity

generation is oil-based and tariff setting is influenced by severaleconomic, social and political concerns.

Natural gas prices increased 12% for the power and fertilizer sectors,and 136% for other industrial consumers. No increase in prices forsmall-scale industries and transport sectors.


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Key Findings of National Assessment:India: Sectoral impacts of oil price rise

Petroleum sector: Oil marketing companies, which bear 85-90% of subsidies on kerosene and LPG, now recover one-thirdof their loss from upstream oil companies.

Transport sector: Since 2002, prices of petrol increased by60-70% and of diesel by 80-90%, with important repercussionsfor industry due to higher costs on account of transportation.Higher transportation costs will also impact on peoples accessto workplace, markets, and education and health centres.

Fertilizer sector: Prices unchanged since 2002 despite growthin international prices. 25% increase in government subsidy pertonne of urea since 2000.


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Key Findings of National Assessment:India: Microeconomic and poverty impacts of oilprice risecommunity-wide impacts

Income patterns: Increase of 25% among poor households (income< or =Rs 3,000 per month) and by about 61% in non-poor households.No change in employment pattern, which continues to depend onagriculture.

Expenditure patterns: No change in share of energy expenditure intotal household spending on necessities (including food, energy, waterand public transport). However, if expenditure on diesel is included,energy expenditure has declined, possibly due to reduced dieselconsumption of diesel.

Impact on major economic activity (agriculture): Only 3 out ofthe 11 farming families surveyed owned diesel pump sets, others usedelectric pump sets. All farmers travelled 8-14 kms for various activitiessuch as buying seeds, fertilizers, etc., and for taking produce tomarket. Expenditure on transportation increased by about 50%. Therehas also been an increase in fertilizer costs of about 25% and pesticidecosts by over 30%.


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Key Findings of National Assessment:India: Microeconomic and poverty impacts of oilprice risedirect impacts on households

Changes in energy expenditure: 45% increase among poorhouseholds and 59% increase among non-poor households, mainly dueto higher prices of kerosene, LPG and diesel.

Changes in energy consumption: 39% of households have stopped

using LPG/kerosene for cooking while 44% have reduced consumptionof these fuels to less than 50%. Resultant increase in biomass fuelconsumption stated to have increased health hazards and timeexpenditure on fuel gathering. Many households stay in darkness forlonger hours due to reduced use of kerosene for lighting.

Transportation costs: Cost per trip by public transport to school,

health centre and marketplace have nearly doubled. Health careaffected the most due to 8 kms. distance to nearest hospital. Somefamilies have withdrawn children from better quality schools to lowerquality schools closer to villages. Poor households affected more due tolonger travel distance and higher reliance on public transport.


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Comments for Follow-Up

Global Assessment

o Generally benign assessment of impacts so far and outlook due toreliance on limited secondary data sources need for furtherresearch and live consultations to present more conservative viewas an alternative future

o Time lag factor not fully addressed, with inadequate coverage oflonger term impacts

o Basic assumption of cyclical trend in oil prices debatable as there is

an emerging school of opinion suggesting prices may have entereda secular trend

o Importance of US Dollars future and its potential adverse impactson world economy and oil prices not fully understood/addressed

o Related to above, potential implications of emerging barter trade in

oil (e.g., Venezuela) and Euro bourse for oil not addressed


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Comments for Follow-Up

Regional Assessment

o Geophysical and geopolitical informative but not very usefulto assess vulnerability of sub-regions

o Poverty and inequality profiles useful, but need to becorrelated to energy profiles

o Need for live consultations with different stakeholders

National/micro assessment

o Longer term impacts not adequately covered

o Contradicting results of micro level assessment needreconciliation

o Some data, e.g., reversion to biomass due to LPG/keroseneprice increase, questionable as these are not commoncooking fuels, especially by poor.

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