Transcript Document
The Great Plunge in Oil Prices: Causes, Consequences, and Policy Responses
May 4, 2015
Martin Raiser [email protected]
Country Director World Bank Country Unit Turkey
This Presentation is Based on
• •
The Great Plunge in Oil Prices: Causes, Consequences and Policy Responses
by Baffes, Kose, Ohnsorge, and Stocker
World Bank Policy Research Note, No: 1
Commodity Markets Outlook -- (January, April, July, and October) April 22, 2015 Turkey Focus Note -- December 2014
• •
Global Economic Prospects -- (January and June) June 2015 http://www.worldbank.org/en/publication/global-economic-prospects http://www.worldbank.org/turkey
2
Plunge in Oil Prices: Four Questions
1. How does it compare with previous episodes?
A sharp drop; similarities with 1986; soft prices in 2015-17
2. What are the causes?
Mostly supply driven; other long- and short-term factors
3. What are the economic and financial consequences?
Net growth benefit but mitigating factors; lower inflation in 2015; financial market volatility; regional spillovers
4. What are the main policy implications?
Fiscal and monetary adjustments; subsidy and tax reforms…
3
80 50 20 -10 200 170 140 110
Oil Price Decline: Third Largest in Recent History
Real Oil Price
(US$ per barrel)
OPEC abandons price targeting:
-66.4% in 82 days
First Gulf War:
-47.9% in 71 days
OPEC abandons price targeting:
-51.2% in 83 days
2008 financial crisis:
-76.7% in 113 days Source: World Bank.
Note: Oil price deflated by U.S. CPI, normalized to 1 in December 2014. The last observation is for March 2015 (assuming CPI level constant from February). Significant decline episodes: cumulative change over a 6-month period.
4
Other Commodity Prices: Downward Pressures
120 Natural Gas and Crude Oil Prices
(US$/bbl) (US$/mmbtu)
13 Impact of Oil on Other Commodity Prices
(Elasticity)
0,4 12 100 11 0,3 80 60 40 Crude oil (LHS) Natural gas (RHS) 10 7 6 9 8 0,2 0,1 0,0
Source: World Bank, Baffes (2007) Note: Left panel:“mmbtu”, Million British thermo unit. “Crude oil” is unweighted price of WTI, Dubai and Brent oil prices. “Natural gas” is European natural gas price. The last observations are for March 2015.
5
Low Commodity Prices Going Forward
Commodity Price Indices
(Index=100 in 2010, Nominal in US$)
140 120 100 80 Energy Metals Agriculture 60 40 20 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: World Bank.
Note: The last historical observation is for 2014, the last forecast is for 2017. The energy index includes oil, natural gas and coal. The agriculture index includes grains, edible oils, oil seeds, and tropical commodities. The metals index includes the six base metals (aluminum, copper, lead, nickel, tin and zinc) and iron ore. Forecast values for energy, metals and agriculture prices in 2017 are, respectively, 39%, 31%, and 21% lower than their 2011 levels.
2020
6
Global Growth: Net Positive Impact but Many Mitigating Factors
•
Positive impact on global growth (based on model simulations)
45 percent supply-driven decline could add 0.7 to 0.8 percent to global GDP
But mitigating factors (affecting the growth forecasts)
• • • • • Crisis legacies and weak confidence Monetary policy constraint Changing relationship between oil and activity Reduced investment in new oil exploration or development Weak demand 13
6
Past Oil Price Drops Followed by Mixed Performance
Global GDP Growth
(Year-on-year, in percent)
1986Q2 1991Q1 1998Q1 2001Q4 2008Q4 2014Q4 4 2 0 -2 -4 -6 -8 -6 -4 -2 0 Quarters 2 4 6 8
Source: World Bank.
Note: Global GDP growth computed on the basis of a weighted average (using 2010 USD GDP weights) of countries for which quarterly national account data is available. Time “0” is the quarter of the trough in significant oil price decline episodes. “-8” corresponds to 8 quarters (2years) before that trough and “8” correspond to 8 quarters after.
8
2 3 4
Global Inflation: A Temporary Dip in 2015
7 Inflation Around Drops in Oil Prices
(Year-on-year, percent)
6 5 1986Q2 1991Q1 1998Q1 2001Q4 2008Q4 5 4 Global Inflation
(Year-on-year, percent)
Inflation (LHS) Projection (LHS) Oil price changes (RHS) 80 40 3 0 2 -40 1 1 0 -1 -8 -6 -4 -2 0 2 4 6 8 0 2010 12 14 16
Source: World Bank.
Note: Left panel: Inflation in high income countries. Time “0” is the quarter of the trough in significant oil price decline episodes. “-8” corresponds to 8 quarters (2years) before that trough and “8” correspond to 8 quarters after. “Inflation” indicates a consumption weighted average of inflation rates of 16 members of the G20. “Inflation projection” is based on country specific VAR models for these 16 countries (including year-on-year growth in consumer prices, producer prices, oil prices (in local currency), the nominal effective exchange rate and the deviation of industrial production from its Hodrick Prescott-filtered trend)
-80 9
The Impact on Turkey: Positive Overall, but no Game Changer so far
• Gross impact on growth of a 40% price fall would be around 1.5 ppts – offset by weak global demand and investor confidence 13
The Impact on Turkey: Positive Overall, but no Game Changer so far
• Gross impact on inflation around 1.2 ppts – offset by exchange rate and food prices 13
The Impact on Turkey: Positive Overall, but no Game Changer so far
• Impact on the CAD around 1.5 ppts – headline affected by gold exports 13
The Impact on Turkey: Positive Overall, but no Game Changer so far
13
Thanks!
Questions & Comments
Martin Raiser [email protected]
FULL PRESENTATION OF THE PAPER
The Great Plunge in Oil Prices: Causes, Consequences, and Policy Responses
April 15, 2015
M. Ayhan Kose [email protected]
Development Prospects Group World Bank Group
This Presentation is Based on
• •
The Great Plunge in Oil Prices: Causes, Consequences and Policy Responses
by Baffes, Kose, Ohnsorge, and Stocker
World Bank Policy Research Note, No: 1
Commodity Markets Outlook -- (January, April, July, and October) April 22, 2015
•
Global Economic Prospects -- (January and June) June 2015 http://www.worldbank.org/en/publication/global-economic-prospects
18
Plunge in Oil Prices: Four Questions
1. How does it compare with previous episodes?
A sharp drop; similarities with 1986; soft prices in 2015-17
2. What are the causes?
Mostly supply driven; other long- and short-term factors
3. What are the economic and financial consequences?
Net growth benefit but mitigating factors; lower inflation in 2015; financial market volatility; regional spillovers
4. What are the main policy implications?
Fiscal and monetary adjustments; subsidy and tax reforms…
19
Plunge in Oil Prices: Four Questions
1. How does it compare with previous episodes?
A sharp drop; similarities with 1986; soft prices in 2015-17
2. What are the causes?
Mostly supply 3. What are the consequences?
Net growth benefit but mitigating factors; lower inflation in 2015; financial market volatility 4. What are the policy implications?
Subsidy and tax reforms; fiscal and monetary adjustments 5. What can the World Bank do?
Support policies
20
80 50 20 -10 200 170 140 110
Oil Price Decline: Third Largest in Recent History
Real Oil Price
(US$ per barrel)
OPEC abandons price targeting:
-66.4% in 82 days
First Gulf War:
-47.9% in 71 days
OPEC abandons price targeting:
-51.2% in 83 days
2008 financial crisis:
-76.7% in 113 days Source: World Bank.
Note: Oil price deflated by U.S. CPI, normalized to 1 in December 2014. The last observation is for March 2015 (assuming CPI level constant from February). Significant decline episodes: cumulative change over a 6-month period.
21
A Sharp Drop in Oil Prices Since June 2014
140 Oil Prices
(US$ per barrel)
Cumulative Changes in Commodity Prices
(Percent change)
10 120 100 0 -10 -20 -30 80 -40 60 -50 2014Q2-2015Q1 2011Q1-2014Q2 40 -60 2008 2009 2010 2012 2013 2014 Oil Agriculture Metals and minerals
Source: World Bank. Note: Left panel: Monthly average of WTI, Dubai, and Brent oil prices. Last observation is for March 2015. Horizontal line denotes $105 per barrel, the average for January 2011-June 2014.
22
Right panel: Commodity prices: average of 21 agricultural goods, and 7 metal and mineral commodities.
Oil Price Likely to Stay Weak
2014 Oil Price Forecast
(Percent change relative to previous year)
2015 Baseline Forecast 2015 Futures Prices 0 -10 -20 -30 -40 -50
Source: World Bank. Note: Oil price defined as unweighted average of Dubai, Brent, and WTI prices.
The baseline forecast in 2015 is $53/bbl. The 2015 futures price represents the average of all closing futures contracts (11 contracts, May-Dec 2015) for the trade index of 5 Trading Days prior to Apr. 10th, 2015. This price (which is equal to $56.95) represents the average of Brent WDI & Dubai futures contracts.
23
Low Commodity Prices Going Forward
Commodity Price Indices
(Index=100 in 2010, Nominal in US$)
140 120 100 80 Energy Metals Agriculture 60 40 20 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: World Bank.
Note: The last historical observation is for 2014, the last forecast is for 2017. The energy index includes oil, natural gas and coal. The agriculture index includes grains, edible oils, oil seeds, and tropical commodities. The metals index includes the six base metals (aluminum, copper, lead, nickel, tin and zinc) and iron ore. Forecast values for energy, metals and agriculture prices in 2017 are, respectively, 39%, 31%, and 21% lower than their 2011 levels.
2020
24
4 8 6
Supply Uncertainty Leads to Higher Volatility
Oil Price Volatility
(Percent)
OPEC abandons price targeting 2008 financial crisis First Gulf war OPEC abandons price targeting
2 0
Source: World Bank.
25
Other Commodity Prices: Downward Pressures
120 Natural Gas and Crude Oil Prices
(US$/bbl) (US$/mmbtu)
13 Impact of Oil on Other Commodity Prices
(Elasticity)
0,4 12 100 11 0,3 80 60 40 Crude oil (LHS) Natural gas (RHS) 10 7 6 9 8 0,2 0,1 0,0
Source: World Bank, Baffes (2007) Note: Left panel:“mmbtu”, Million British thermo unit. “Crude oil” is unweighted price of WTI, Dubai and Brent oil prices. “Natural gas” is European natural gas price. The last observations are for March 2015.
26
Food Commodities: Impact of Lower Cost of Energy
Share of Energy Input in Production
(Percent, 2007)
World High income Developing SSA US Canada EU-12 China Brazil India Turkey Manufacture Agriculture 0 3 6 9 12 15 18 Impact of Oil Prices on Food Prices Cotton Wheat Rice Maize Soybeans Palm oil 0,0
(Elasticity)
0,1 0,2 0,3
Source: Author’s calculations based on the GTAP database (shares) and Baffes and Etienne (2014) (elasticities).
Notes: Elasticity estimates are based on an SUR reduced-form econometric model, 1960-2013 annual data.
27
Plunge in Oil Prices: Four Questions
1. How does it compare with previous episodes? A sharp drop; similarities with 1986 2. What are the causes?
Mostly supply driven; other long- and short-term factors
Net growth benefit but mitigating factors; lower inflation in 2015; financial market volatility 4. What are the policy implications?
Subsidy and tax reforms; fiscal and monetary adjustments 5. What can the World Bank do?
Support policies
28
20 15 10 5 0
Oil Price Plunge: Changing Supply and Demand Dynamics
Oil Production
(mb/d, Equivalent for biofuel)
Oil Intensity of GDP and Energy Consumption
(Percent of energy Consumption)
60
(Index = 1 in 1954)
1,2 U.S. oil Canada oil Global biofuel (RHS) 50 1,0 40 0,8 30 20 10 Oil intensity of energy consumption (LHS) Oil intensity of GDP (RHS) 0,6 0,4
Source: BP statistical review, World Bank , IEA.
Note: Right panel: Blue line is oil consumption in percent of global energy consumption. Red line is quantity of oil used per unit of global real GDP, indexed to 1 in 1954. 29
13
Oil Price Plunge: Stronger Supply and Weaker Demand
Monthly U.S Oil Supply
(Million barrels per day)
Monthly Global Oil Demand
(Million barrels per day)
95 2015 2015 94 12 93 11 2014 2013 92 2013 2014 10 91 9 8 Jan Apr Jul Oct Jan Apr Jul Oct Jan 90 Dot line: projection Solid line: actual 89 Jan Apr Jul Oct Jan Apr Jul Oct Jan
Source: IEA.
Note: All oil supply/demand, including crude oil, biofuels and liquids. The last observations are for February 2015.
30
Supply Shocks: Dominant Driver
Supply and Demand Shocks
(Percent)
0 -10 -20 -30 -40 -50 -60 -70
Source: Bloomberg, FRED, Haver Analytics, World Bank estimates.
Note: Based on estimates from the model, identifying the demand and supply shocks using sign restrictions. All shocks except the shock of interest are shut off by setting them to zeros and the model is used to trace out the counterfactual oil price. This exercise is performed separately for supply and demand shocks. The red (blue) counterfactual shows how much oil prices would have declined during the second half of 2014 only with the estimated supply (demand) shocks. Numbers shown are in cumulative percentages.
5 0 -5 -10 -15 -20 -25
Dollar Appreciation: Coinciding with Price Drop
Crude Oil Price and US Dollar (US$, 1973 = 100) 95 90 85 Index against major currencies Brent price (RHS) 80 75 (US$/bbl) 120 100 80 60 40
Source: World Bank, Bloomberg, Federal Reserve Bank of Saint Louis.
Note: The last observation of Brent price is for Apr. 8 th , 2015, that of the index is for Apr. 3 rd , 2015.
32
Crude oil Production
Changing Sources of Supply: The New Oil Map
Conventional (OPEC & non-OPEC) Existing Sources Oil sands (Canada) Biofuels (Global) Unconventional (mostly non-OPEC) New Sources Shale oil (United States) Shale oil reserves (Russia, China, Argentina, Libya) Arctic exploration (U.S., Russia, Canada, Greenland, Norway) Deep sea oil exploration (Brazil, Mexico, West Africa)
Source: World Bank.
33
Plunge in Oil Prices: Four Questions
1. How does it compare with previous episodes? A sharp drop; similarities with 1986 2. What are the causes?
Mostly supply 3. What are the economic and financial consequences?
Net growth benefit but mitigating factors; lower inflation in 2015; financial market volatility; regional spillovers
4. What are the policy implications?
Subsidy and tax reforms; fiscal and monetary adjustments 5. What can the World Bank do?
Support policies
34
Global Growth: Net Positive Impact but Many Mitigating Factors
•
Positive impact on global growth (based on model simulations)
45 percent supply-driven decline could add 0.7 to 0.8 percent to global GDP
But mitigating factors (affecting the growth forecasts)
• • • • • Crisis legacies and weak confidence Monetary policy constraint Changing relationship between oil and activity Reduced investment in new oil exploration or development Weak demand 13
6
Past Oil Price Drops Followed by Mixed Performance
Global GDP Growth
(Year-on-year, in percent)
1986Q2 1991Q1 1998Q1 2001Q4 2008Q4 2014Q4 4 2 0 -2 -4 -6 -8 -6 -4 -2 0 Quarters 2 4 6 8
Source: World Bank.
Note: Global GDP growth computed on the basis of a weighted average (using 2010 USD GDP weights) of countries for which quarterly national account data is available. Time “0” is the quarter of the trough in significant oil price decline episodes. “-8” corresponds to 8 quarters (2years) before that trough and “8” correspond to 8 quarters after.
36
100 80 60 40 20 0
Oil Consumption Differs Across Economies
Natural gas Consumption of Energy, 2013
(Percent of total energy consumption)
Coal Hydro electric Nuclear energy Oil Renewables
Sources: BP Statistical Review. Note: Oil consumption is measured in million of tonnes; other fuels in million of tonnes of oil equivalent.
Emerging Economies: Major Importers and Exporters of Commodities
80 China and India in Global Commodity Imports
(Percent)
Selected Emerging Economies in Global Commodity Exports
(Percent)
60 China India 60 50 40 Chile Malaysia South Africa Nigeria Russian Federation Indonesia Brazil 40 30 20 0 20 10 0
Sources: World Development Indicators, UN Comtrade. Note: Right Panel: average over 2008-13. Including exports of ores (e.g. bauxite) and oil products.
2 3 4
Global Inflation: A Temporary Dip in 2015
7 Inflation Around Drops in Oil Prices
(Year-on-year, percent)
6 5 1986Q2 1991Q1 1998Q1 2001Q4 2008Q4 5 4 Global Inflation
(Year-on-year, percent)
Inflation (LHS) Projection (LHS) Oil price changes (RHS) 80 40 3 0 2 -40 1 1 0 -1 -8 -6 -4 -2 0 2 4 6 8 0 2010 12 14 16
Source: World Bank.
Note: Left panel: Inflation in high income countries. Time “0” is the quarter of the trough in significant oil price decline episodes. “-8” corresponds to 8 quarters (2years) before that trough and “8” correspond to 8 quarters after. “Inflation” indicates a consumption weighted average of inflation rates of 16 members of the G20. “Inflation projection” is based on country specific VAR models for these 16 countries (including year-on-year growth in consumer prices, producer prices, oil prices (in local currency), the nominal effective exchange rate and the deviation of industrial production from its Hodrick Prescott-filtered trend)
-80 39
4 6
Inflation: Diverging Trends
8 Inflation
(Median, percent, year-on-year, monthly)
Oil importers Oil exporters 40 Interest Rates: Hikes vs Cuts
(Number of policy rate changes)
Hikes Cuts 30 20 10 2
Source: World Bank, Haver Analytics. Note: Left panel: the last observation is for December 2014.
0 Oil Ex. Oil Im. Oil Ex. Oil Im. Oil Ex. Oil Im.
14-Q3 14-Q4 15-Q1
40
20 18 8 6 4 2 16 14 12 10 0
Links between Energy and Inflation: Varies Across Countries
Weight of Energy in National CPI Baskets
(Percent)
Source: World bank, OECD, Morgan Stanley, IMF, Capital Economics.
Note: Compiled from OECD (for high-income countries, Hungary, Mexico and South Africa); Morgan Stanley (for China); IMF (for India, Indonesia, Malaysia, Thailand and the Philippines); and Capital Economics (Brazil and Russia). Excludes transport.
100
Some Oil-Exporters under Financial Pressure
Exchange Rate Against the U.S. Dollar
(Index = 100 in Oct 2014)
Stock Price Index
(Index = 100 in Oct 2014)
Malaysia Kazakhstan Dec-14 Feb-15 Mexico Apr-15 Oct-14 80 Colombia Nigeria Dec-14 India Russia Feb-15 Apr-15 Indonesia Turkey Oct-14 130 120 110 120 100 90 140 80 70 160 60 180 50
Sources: Haver Analytics. Note: Left panel: U.S. dollars per local currency unit, indexed to Oct 2014 as 100. The y-axis is reversed to show local currency’s depreciation. Last observation is April 1 st , 2015.
Right panel: last observation is April 13 th , 2015.
42
0
Potentially Large Regional Spillovers from Russia and Venezuela
Impact of 1ppt Decline in Russian Growth
(Percent deviation from the baseline)
8 External Financing Provided by Venezuela to Beneficiary Countries
(Percent of GDP, 2012)
-0,2 -0,4 7 6 5 -0,6 -0,8 -1 4 3 2 1 Country Average = 1.6
-1,2 0 Baltics Kazakhstan Turkey Slovakia/ Slovenia Belarus
Sources: World Bank and IMF(2014).
Note: Developing CIS data is GDP-weighted average of World Bank client countries in Central Asia.
18
Plunge in Oil Prices: Four Questions
1. How does it compare with previous episodes? A sharp drop; similarities with 1986 2. What are the causes?
Mostly supply 3. What are the consequences?
Net growth benefit but mitigating factors; lower inflation in 2015; financial market volatility 4. What are the main policy implications?
Fiscal and monetary adjustments; subsidy and tax reforms…
5. What can the World Bank do?
Support policies
44
200 160 120 80 40 0
Subsidy Reforms: A Timely Measure
Fiscal Break-Even Price, 2015
(US$ per barrel)
15 10 5 0 25 Fiscal Cost of Fossil Fuel Subsidies, 2013
(Percent of GDP)
Oil exporters Oil importers 20
Source: IEA Fossil Fuel Subsidy Database, IMF. Note: Countries where the fiscal cost of fossil fuel subsidies is below 1 percent of GDP are not shown. Fiscal break-even price is the oil price that balances the budget.
45
Subsidy Benefits: More for Higher Income
50 40 30 Subsidy Benefits by Consumption Quintile: Comparison Across Regions
(Percent)
Bottom 2 3 4 Top 20 10 0 Africa South and Central America Other Regions
Source: Arze del Granado, Coady, and Gillingham (2012), Vagliasindi (2012).
Note: Share of the total benefit from different fuel price subsidies for households across grouped by consumption levels.
All Regions
Plunge in Oil Prices: Four Questions
1. How does it compare with previous episodes?
A sharp drop; similarities with 1986; soft prices in 2015-17
2. What are the causes?
Mostly supply driven; other long- and short-term factors
3. What are the economic and financial consequences?
Net growth benefit but mitigating factors; lower inflation in 2015; financial market volatility; regional spillovers
4. What are the main policy implications?
Fiscal and monetary adjustments; subsidy and tax reforms…
47
Thanks!
Questions & Comments
M. Ayhan Kose [email protected]