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Oil Shocks: a long-run perspective (1900-2006)

XXIV Meeting of the Latin American Network of Central Banks and Finance Ministries The Effect of Oil Prices The Case of the Importers Fidel Jaramillo Inter-American Development Bank Regional Economic Advisor Andean Region and the Caribbean Washington D.C, October 19-20, 2006.

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Oil Shocks: a long-run perspective (1900-2006)

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  1. XXIV Meeting of the Latin American Network of Central Banks and Finance MinistriesThe Effect of Oil PricesThe Case of the ImportersFidel JaramilloInter-American Development BankRegional Economic AdvisorAndean Region and the CaribbeanWashington D.C, October 19-20, 2006

  2. Oil Shocks: a long-run perspective (1900-2006) Oil Price (Annual Average, US$/barrel) Iranian Crisis (’79-’81) US-Dominated Market (-’34) Kuwait Invasion (’90) Upswing (2000-) Arab Oil Embargo (‘74) 7 Sisters Agreement (’34-’73)) Source: Bloomberg, IADB

  3. Current trend has been persistent… Oil Price Variation (month zero to peak) Nº months to peak Starting date End date Episode* Yom-Kippur War and OPEC oil embargo 317% 10 Apr-73 Jan-75 22 152% 11 Jan-79 Jun-80 18 Iranian Revolution Iraq's Invasion of Kuwait 3 103% Aug-90 Dec-90 5 29 115% Dec-03 n.a. 29 Current Shock Source: Bloomberg, Latin Macro Watch, 2006, IADB.

  4. World Oil Consumption World Oil Consumption 100.5 (month of shock = 0) (month of shock = Dec-03) 105 100 104 month zero = 100 Dec-03 = 100 103 99.5 102 99 101 100 98.5 Jun-04 Jun-05 Mar-04 Mar-05 Dec-03 Sep-04 Dec-04 Sep-05 Dec-05 0 2 4 6 8 10 12 14 16 18 20 22 24 Nº of months after the shock …explained by a shock of different nature Previous Shock* Current Shock Oil Price Oil Price 210 190 (month of shock = 0) (month of shock = Dec-03) 180 190 170 170 Dec-03 = 100 160 month zero = 100 150 150 140 130 130 120 110 110 100 90 90 Jun-04 Jun-05 Mar-04 Mar-05 Dec-03 Sep-04 Dec-04 Sep-05 Dec-05 0 2 4 6 8 10 12 14 16 18 20 22 24 Source: Latin Macro Watch, 2006

  5. Demand Shock Demand Shock Demand1 (Yw1) Demand (Yw1) Oil Demand Shocks: A Simple Graphical Analysis Oil Market Commodities Market Price (Poil) Price (Pc) Supply Supply P1oil p1c p0oil p0c Demand0 (Yw0) Demand (Yw0) Quantity (qoil) Quantity (qc) q1oil q0oil q1c q0c Yw = World Output Source: Latin Macro Watch, 2006

  6. Economic Activity Economic Activity (month of shock=0) (month of shock = Dec-03) 108 102 107 101 Rest of G-7** 106 100 105 99 US Dec-03 = 100 104 month zero = 100 98 Rest of G-7** 103 97 US 102 96 101 95 100 94 99 93 0 2 4 6 8 10 12 14 16 18 20 22 24 Jun-04 Jun-05 Dec-03 Feb-04 Oct-04 Feb-05 Oct-05 Dec-04 Dec-05 Apr-04 Apr-05 Aug-04 Aug-05 **includes Canada, France, Germany, Italy, Japan & UK Current Account Current Account (in % of GDP, net oil importers in each episode; month of shock = 0) (in % of GDP,net oil importers; month of shock = Dec-03) -2.0% 1.40% 1.20% -2.2% 1.00% -2.4% 0.80% -2.6% 0.60% -2.8% 0.40% % of GDP % of GDP -3.0% 0.20% -3.2% 0.00% -3.4% -0.20% -3.6% -0.40% -3.8% -0.60% -4.0% 0 2 4 6 8 10 12 14 16 18 20 22 24 Apr-04 Oct-04 Apr-05 Oct-05 Jun-04 Jun-05 Feb-04 Feb-05 Dec-03 Aug-04 Dec-04 Aug-05 Dec-05 Nº of months after the shock Growth and external sector have been strong… Previous (supply) Shock* Current (demand) Shock *Yom-Kippur War and OPEC oil embargo (Oct-73), Iranian Revolution (Jan-79) and Iraq's Invasion of Kuwait (Aug-90) Source: Latin Macro Watch, 2006

  7. Current Shock(month of shock = Dec-03) 210 190 Variation Oil 180 +115.2% Oil Metals +72.4% 170 190 Beverages +22.0% 160 Foods +2.5% 150 Agricultural Raw Materials +0.5% 170 140 month zero = 100 130 -15.7% Metals 150 Metals Beverages -31.2% 120 Foods -13.2% Metals 110 Agricultural Raw Materials -25.3% 130 Beverages 100 Food 90 110 80 Agricultural Raw Materials 70 Agricultural Raw Materials Beverages Food 90 60 Oct-04 Oct-05 Apr-04 Apr-05 Jun-04 Jun-05 Feb-04 Feb-05 Feb-06 Dec-03 Aug-04 Dec-04 Aug-05 Dec-05 …with oil and commodity prices moving together (Oil and commodity prices deflated by US CPI) Previous Shock*(month of shock = 0) Variation Oil +70.5% Oil 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Nº of months after the shock *Yom-Kippur War and OPEC oil embargo (Oct-73), Iranian Revolution (Jan-79) and Iraq's Invasion of Kuwait (Aug-90) Source: Latin Macro Watch, 2006

  8. Oil demand has been increasing, in particular from non OECD Asia Source: IADB, 2006

  9. …while oil supply from OECD has declined Incremental Oil Production by region (Thousand of barrels per day) Source: IADB, 2006

  10. Impact on Latin America and the Caribbean: The case of the net importers Net Oil Exports as a Share of GDP(2004) • Net importers • South America • Chile • Paraguay • Uruguay • Central America • Costa Rica • Nicaragua • El Salvador • Caribbean • Barbados • Jamaica • Guyana • Suriname Source: UN Comtrade, World Development Indicators. IADB

  11. Most countries have become more energy-efficient… Source:OLADE 2006

  12. …but per capita consumption has been increasing Source:OLADE 2006

  13. Transport sector is the major oil consumer… Source:OLADE 2006

  14. …and has increased its demand significantly Source:OLADE 2006

  15. Oil bill is taking toll on imports… • Impact • External Accounts • Growth • Fiscal balance • Inflation Source: UN Comtrade, World Development Indicators

  16. …but external accounts have not deteriorated (due to positive global demand shock…) Current Account (in % of GDP) Source:Word Development Indicators, bloomberg, IMF

  17. …although partial effect may be sizeable Source:Word Development Indicators, IADB

  18. Oil price impact on real exchange rate (assuming sudden stop of external capital and all other variables constant) Source: IADB 2006

  19. So far, current oil price increases have not harmed growth prospects... (also due to positive global demand shock…) Real GDP Growth Source:Word Development Indicators, Bloomberg, IADB

  20. …but vulnerabilities remain (impact of a 100% increase in oil prices) Impact of Higher Prices on Economic Growth Latin America and the Caribbean: Net Oil Importers by Sub-Region* 0.0% -0.2% -0.4% -0.6% -0.8% -1.0% -1.2% -1.4% South America Central America Caribbean Countries -1.6% -1.8% * Weighted at PPP adjusted GDP. *Guyana and Jamaica are own calculations using World Bank 2006 methodology Source: Assesing the impact of Higher Oil Prices in Latin America. World Bank 2006. Latin Macro Watch, 2006

  21. Pass-through to inflation is affecting the region… Average Inflation per Region * Caribbean Average excludes Suriname Source:World Development Indicators

  22. …and could have an effect on public finances Global Central Government Balance (as a % of GDP) Source:IMF, EIU, WEO

  23. What can we expect…? Monthly Oil Stocks for OECD Countries January 2001- May 2006 (Mbbl) Oil Price Scenario 2000-08 WTI spot price per barrel ($/b) end of period weekly Historical: 14/1/2000 - 22/9/2006 Forecast: 29/9/2006 - 26/12/2006 52 weeks moving average and possible lower boundary Source:Bloomberg, Energy Information Administration, IADB

  24. Is there a risk of another supply shock…? Strait of Hormuz Assumptions:* • Closing of the Strait of Hormuz in the event of a conflict with Iran • A reduction of 20% in oil supplies • Demand Elasticity of 0.2 • 100% rise in oil prices or US$ 130 per barrel * Source: Deutsche Bank, Latin Macro Watch

  25. Thanks Fidel Jaramillo IADB, Oct. 19th, 2006

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