Economic Impacts of
Global Petroleum Supply Shocks
Reducing Energy Intensity to Reduce
Vulnerability
Jeffrey F. Werling, PhD
March 23, 2010
Distribution Statement A: Approved for public release; distribution is unlimited.
2 0 1 0 Climate & Ener gy Symposium
Energy Dependence and National Security
• “The U.S. „addiction‟ to oil comes largely from gasoline consumption, which as a share of
GDP is nearly five times that in other major industrial countries.” (IMF, WEO, April 2007)
Total Primary Energy Consumption per Capita
(Million Btu per Person)
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Distribution Statement A: Approved for public release; distribution is unlimited.
Source: Energy Information Administration, DOE
2 0 1 0 Climate & Ener gy Symposium
Energy Dependence and National Security
• Fuel intensity in the U.S. is 30 percent higher than EU and Japan
Total Primary Energy Consumption per Dollar of GDP
(BTU per $ PPP 2005)
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Distribution Statement A: Approved for public release; distribution is unlimited.
Source: Energy Information Administration, DOE
2 0 1 0 Climate & Ener gy Symposium
Economic Damage from Oil Supply Shocks:
Important Factors
• Size matters: 9.6 MBD is more than twice 4.8 MBD.
• Duration: 6 months is more than twice 3 mos.
• Current supply/demand equation: Is there unused capacity?
• What is the underlying cause? Military/civil strife will tend to
have a negative psychological impacts.
• Did the shock appear unexpectedly or were there warnings?
• Perceptions: Is price spike is temporary or permanent?
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2 0 1 0 Climate & Ener gy Symposium
Economic Resilience
•
Actions that mute the direct and indirect shocks by using remaining
resources as efficiently as possible and by compressing the time-span
of losses by speeding recovery.*
•
Price rationing (inherent resilience) minimizes economic damage:
Available energy flows to highest value activities. Large and efficient
markets in energy are more resilient.
•
Fuel subsidies/price controls hamper adjustment (US vs. China).
•
Excess capacity, inventories and SPR. Planning and assets
necessary for tapping reserves (e.g., logistics).
•
Non-price demand measures (adaptive resilience) such as input
substitution, and changes to economic behavior (car pooling).
Planning and assets to realize these conservation measures.
*Rose, A. 2004. “Defining and Measuring Economic Resilience to Disasters,” Disaster Prevention and Management 13: 307-14.
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Policy Considerations for a Substantial Oil Supply Shock
• Monetary policy will focus on financial market liquidity, stabilization.
Given higher inflation, a direct reaction to lower growth will secondary.
• Fiscal Policy effectiveness and options would be very limited.
• Some non-price rationing might be necessary, especially with large
shocks. Examples: Reducing work/school days to 4/week. EvenOdd?
• Fuel subsidies, taxes and surcharges.
• Strategic Petroleum Reserve and associated logistics.
• Distribution Decisions: High prices hit vulnerable groups. Something
to think about ahead of time.
• Planning can be important. Adds to resilience.
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Global Petroleum Flows
U.S. Supply sources are diversified
Source: National Petroleum Council
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2 0 1 0 Climate & Ener gy Symposium
Petroleum Market
But “the price” is determined in a global market
Global
Supply
Global
Demand
Global price
determination: $/bbl
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2 0 1 0 Climate & Ener gy Symposium
Is there scope for maintaining supply through
control of resources or long term contracts?
• Currently, at the margin petroleum is sold to the highest
bidder.
• This market price sets prices globally, event those
associated with long-term contracts or with intra-country
sales.
• A 5-10% global supply interruption would probably not alter
the current regime, that is, the price mechanism would apply
globally.
• Larger shocks, or some altered, and plausible geopolitical
situations, might alter this conclusion.
Distribution Statement A: Approved for public release; distribution is unlimited.
2 0 1 0 Climate & Ener gy Symposium
Oil Shock Simulations
Baseline:
• The economy enters 2009 growing slowly.
• End of 2008, oil prices are about $114/bbl.
Global oil supply disruption from Jan 1 to Jun 30, 2009:
• A: 4.8 MBD ( 5.5%) for 6 months.
• B: 9.6 MBD (11.0%) for 6 months.
• US and other SDRs tapped.
Global price reaches:
• A: $175/bbl by February, recedes slightly thereafter
• B: $289/bbl
• Uncertainty, anxiety adds to price pressure
• Some (non-Saudi) capacity and reserves relieve pressure (A:
1.25MBD; B:3.0 MBD).
• Rationing primarily through price, but significant non-price rationing
occurs, especially in case B.
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2 0 1 0 Climate & Ener gy Symposium
Global Oil Supply
Million Barrels per day
100
90
80
70
Case B: -9.6 mbd
Case A: -4.8 mbd
60
50
40
30
20
10
2 0 1 0 Climate & Ener gy Symposium
0
N
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10
0
Distribution Statement A: Approved for public release; distribution is unlimited.
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Global Oil Prices
350
300
Case B: -9.6 mbd
Dollars per barrel
250
200
150
100
50
Case A: -4.8 mbd
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Distribution Statement A: Approved for public release; distribution is unlimited.
2 0 1 0 Climate & Ener gy Symposium
0
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Economic Damage of Price Shocks
1. Income/Demand Effects
Higher prices are an OPEC “tax” on consumers, firms and govt., as revenue
flows abroad. Demand reduced for everything else.
2. Supply or Substitution Effects
Rising energy costs reduce profits or increase prices, especially for energy
intensive items (transportation/tourism, chemicals). Demand for these reduced.
3. Policy Effects
Higher energy prices spark inflationary pressure and causes monetary
authorities to tighten credit conditions. Government energy bills rise
substantially, crimping fiscal stimulus.
4. Effects on Confidence and Financial Market Psychology
Hurt consumer and investor confidence. As security prices, household wealth
decline economy is weakened. Effects would be especially strong if cause is a
major geopolitical event, such as a terrorist attack.
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Gasoline prices rise sharply
Average price of gasoline, $ per gallon, average of all grades
7.00
9.6 MBD Shock
6.00
4.8 MBD Shock
5.00
4.00
Baseline forecast
3.00
2.00
2008
cpgas_q
2010
apgas_q
bpgas_q
Distribution Statement A: Approved for public release; distribution is unlimited.
2 0 1 0 Climate & Ener gy Symposium
U.S. GDP Impacts: Damage is exponential.
“Inherent” resilience contributes to “healing” in the intermediate term.
Real GDP in billions of 2000 dollars
14000
13000
Baseline forecast
12000
9.6 MBD Shock
11000
2008
2010
Distribution
Statement A: Approved
for public release; distribution is unlimited.
usgdp_9.6mb
usgdp_4.8mb
usgdp_base
2 0 1 0 Climate & Ener gy Symposium
Employment is hit very hard.
U.S. Civilian employment, millions of jobs
160.0
155.0
Baseline
forecast
150.0
145.0
9.6 MBD
140.0
2008
clftq
2010
Distribution
for public release; distribution is unlimited.
alftq Statement A: Approved
blftq
2 0 1 0 Climate & Ener gy Symposium
Consumer prices: spike recedes.
Percent difference from baseline
5.00
4.00
3.00
2.00
1.00
0.00
2008
pcapcN
2010
paapcN
Distribution
Statement A: Approved for public release; distribution is unlimited.
2 0 1 0 Climate & Ener gy Symposium
2012
U.S. Summary
United States
2009
2010
2011
2.1
1.1
-1.0
3.4
4.2
6.0
4.0
4.6
5.7
-0.8
-2.5
-1.0
-3.0
-0.3
-0.6
0.3
1.0
-29.7
-89.7
-31.3
-93.5
-147.7
-447.5
-40.9
-93.0
46.7
166.7
Consumer price inflation (% change in prices)
Baseline
1.9
2.4
4.8 MBD shock
8.9
4.8
9.6 MBD shock
22.6
9.1
2.2
-2.8
-10.9
1.9
1.4
0.3
2.6
4.1
6.8
1.7
0.7
-1.2
1.2
1.0
0.6
Consumer prices (% deviation from baseline)
4.8 MBD shock
1.7
2.3
9.6 MBD shock
4.7
6.4
1.0
2.8
0.9
2.4
1.4
4.1
0.4
1.1
0.1
0.5
Unemployment rate
Baseline
4.8 MBD shock
9.6 MBD shock
5.8
6.9
9.2
5.7
6.7
8.9
5.8
6.6
8.5
5.0
5.3
5.9
4.5
4.6
4.6
Q2
Q3
Q4
1.4
-2.8
-11.1
2.4
1.4
-0.8
2.8
4.9
9.6
3.1
2.9
2.8
-1.1
-3.2
-1.3
-4.0
-0.8
-2.4
-38.5
-117.7
-48.2
-146.6
GDP Growth baseline
Baseline
4.8 MBD shock
9.6 MBD shock
Difference, percent of real GDP
4.8 MBD shock
9.6 MBD shock
Difference, billions of 2008$
4.8 MBD shock
9.6 MBD shock
2009
Q1
5.8
6.4
7.8
5.8
6.6
8.2
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2 0 1 0 Climate & Ener gy Symposium
Conclusion: Energy Shocks
• Economy‟s dependence on fossil fuels makes it vulnerable to
supply shocks. The negative impacts of shock duration and size
are exponential.
• Petroleum is a global commodity and supply shocks entail global
economic damage.
• Across countries, damage is associated with dependence.
• Economic resilience – inherent and adaptive – reduce the impact of
shocks. Building resilience is a good idea.
• Dependence and vulnerability can be reduced in the long run.
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2 0 1 0 Climate & Ener gy Symposium
Energy, Environment, and Economy (E3)
• Reducing energy use and carbon emissions are front-burner issue.
National security issues are also salient.
• Strong and Positive Policy Leadership that stresses economic
incentives, technology, transformation of economic structures will be
fundamental. Taxes are most effective (recycled to reduce inefficient
taxes on labor and capital). Not an OPEC tax.
• Gradual, but steady, transparent, and permanent policies are required.
• Several potential technology “pathways” provide strong potential.
• A long-term program of reducing fossil fuel energy dependence can
make the economy less vulnerable to shocks.
• Business Roundtable: The Balancing Act: Climate Change, Energy Security
and the U.S. Economy http://www.businessroundtable.org
/sites/default/files/2009.06%20The%20Balancing%20Act_FINAL.pdf
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Myth: Pricing carbon would greatly harm economy
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Thousand Btus per sq. foot per year
Improvements in Commercial Building Efficiency
Driven by Price and Policy
Source: Business Roundtable, The Balancing Act, Climate Change, Energy Security and the U.S. Economy
http://www.businessroundtable.org /sites/default/files/2009.06%20The%20Balancing%20Act_FINAL.pdf
Distribution Statement A: Approved for public release; distribution is unlimited.
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Megawatts
Estimated Nuclear Power Deployment
Capacity of Existing Fleet
Source: Business Roundtable, The Balancing Act, Climate Change, Energy Security and the U.S. Economy
Distribution Statement A: Approved for public release; distribution is unlimited.
2 0 1 0 Climate & Ener gy Symposium
TECHNOLOGY DEPLOYMENT ESTIMATES: BALANCED PORTFOLIO SCENARIOS
Electricity Generation by Source
(Billion kWh, Low-High Average)
Policy Inertia
Business-as-Usual
6,000
Wind & Solar
Wind & Solar
Nuclear
Fossil Fuels (CCS)
Fossil Fuels (CCS)
Fossil Fuels (No CCS)
Fossil Fuels (No CCS)
1,000
2008
2050
2044
2038
2032
2026
2020
2014
2008
2050
2044
2038
2032
2026
2020
2014
2008
Other Renewables
Other Renewables
Other Renewables
0
2026
Fossil Fuels (No CCS)
2014
2,000
Nuclear
2020
3,000
Source: Business Roundtable, The Balancing Act, Climate Change, Energy Security and the U.S. Economy
Light-Duty Vehicle Use by Type in 2050
Distribution Statement A: Approved for public release; distribution is unlimited.
(% of Vehicle Miles Traveled, Low-High Average)
Policy Inertia
2 0 1 0 Climate & Ener gy Symposium
2050
4,000
2044
Nuclear
2038
5,000
Demand
Reduction
Demand
Reduction
Wind & Solar
2032
7,000
Policy Leadership
Real Gross Domestic Product
(% Change from BAU, Low-High Average)
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Carbon Dioxide Emissions
(Gigatons CO2, Low-High Average)
Emissions from Sectors Not
Covered by this Study
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Demand Savings
Figure 1
ESLC/SAFE Policy Impacts on Oil Consumption and Imports
30.0
20.0
15.0
10.0
Source: Securing America’s Future Energy, Summary of the Economic Impacts
of Implementing "Recommendations to the Nation on Reducing U.S. Oil Dependence (2007)
Distribution Statement A: Approved for public release; distribution is unlimited.
2 0 1 0 Climate & Ener gy Symposium
30
20
27
20
24
20
21
20
18
20
15
20
12
20
09
20
06
20
00
20
97
19
94
19
19
91
0.0
03
SAFE Policy - Total Domestic Consumption
Baseline Domestic Total Consumption
SAFE Policy -- Oil Imports
Baseline Oil Imports
5.0
20
MBD Oil Equivalent
25.0
Domestic Supply Expansion
Figure 3
ESLC/SAFE Policy Impacts on Domestic Production
14.0
MBD Oil Equivalent
12.0
10.0
8.0
6.0
SAFE Policy Domestic Oil Production
4.0
Baseline Domestic Production
SAFE Policy Alternative Fuels Production
2.0
Baseline Alternative Fuels Production
20
30
20
27
20
24
20
21
20
18
20
15
20
12
20
09
20
06
20
03
20
00
19
97
19
94
19
91
0.0
Source: Securing America’s Future Energy, Summary of the Economic Impacts of Implementing "Recommendations to the Nation on Reducing U.S. Oil Dependence (2007)
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2 0 1 0 Climate & Ener gy Symposium
Increased Energy Efficiency
Figure 4
Oil Consumption and Imports Intensity of GDP
Barrels per $1000 GDP (2006$)
1.4
1.2
Total Oil Consumption SAFE Policy
Total Oil Consumption Baseline
1.0
Oil Imports SAFE Policy
Oil Imports Baseline
0.8
0.6
0.4
0.2
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
20
06
20
09
20
12
20
15
20
18
20
21
20
24
20
27
20
30
0.0
Source: Securing America’s Future Energy, Summary of the Economic Impacts of Implementing "Recommendations to the Nation on Reducing U.S. Oil Dependence (2007)
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2 0 1 0 Climate & Ener gy Symposium
Economic Resilience to Oil Shocks
Figure 5
Oil Price Shock 2026- 2030: Nominal Price per Barrel
200
180
Oil price shock
Dollars per barrel
160
140
120
100
Baseline
80
60
40
20
0
2020
2022of the2023
2024 of Implementing
2025
2026
2027 to the
2028
2030
Source: Securing America’s
Future2021
Energy, Summary
Economic Impacts
"Recommendations
Nation on2029
Reducing U.S.
Oil Dependence (2007)
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2 0 1 0 Climate & Ener gy Symposium
Economic Resilience to Oil Shocks
Figure 6
Oil Price Shock: Difference in Real Disposable Income
0
Billions of 2006$
-100
-200
SAFE Policies
-300
-400
-500
Baseline
-600
2023
2024
2025
2026
2027
2028
2029
2030
Source: Securing America’s Future Energy, Summary of the Economic Impacts of Implementing "Recommendations to the Nation on Reducing U.S. Oil Dependence (2007)
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2 0 1 0 Climate & Ener gy Symposium
Economic Resilience to Oil Shocks
Figure 7
Oil Price Shock: Difference in Aggregate Employment
0.5
0.0
-0.5
Millions of jobs
-1.0
-1.5
SAFE Policies
-2.0
-2.5
-3.0
-3.5
Baseline
-4.0
-4.5
2023
2024
2025
2026
2027
2028
2029
2030
Source: Securing America’s Future Energy, Summary of the Economic Impacts of Implementing "Recommendations to the Nation on Reducing U.S. Oil Dependence (2007)
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2 0 1 0 Climate & Ener gy Symposium
Conclusion: E3 and National Security
• Energy prices, climate change, Mid-East instability place E3 tradeoffs
on center stage.
• Long-term program of reducing fossil fuel energy dependence can
make the economy less vulnerable to shocks.
• If price rationing through markets is the best way to adapt to a shock,
what is the best way to reduce long run fossil fuel dependence?
• Government mandates vs. energy taxes (recycled to reduce
inefficient taxes on labor and capital). Energy taxes clearly superior.
• Well designed cap and trade schemes indirectly impose such taxes,
though direct taxes are better.
• Good news: We can substantially reduce fossil fuel dependence.
• Bad news: It will take a long time to make much difference.
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China
China
2009
2010
2011
9.1
8.1
6.4
9.1
10.2
12.1
8.2
8.3
8.5
Difference from baseline, percent of real GDP
4.8 MBD shock
-0.9
0.1
9.6 MBD shock
-2.4
0.2
0.2
0.5
Difference from baseline, billions of 2008$
4.8 MBD shock
-41.9
3.2
9.6 MBD shock
-109.1
12.1
8.3
27.8
GDP Growth (% per year)
Baseline
4.8 MBD shock
9.6 MBD shock
Domestic product prices, difference from baseline in percent
4.8 MBD shock
-0.5
0.5
0.5
9.6 MBD shock
-1.2
1.5
1.3
Employment, difference from base in thousands
4.8 MBD shock
-1894
-711
9.6 MBD shock
-5142
-1704
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2 0 1 0 Climate & Ener gy Symposium
171
717
Japan
Japan
2009
2010
2011
0.9
-0.3
-2.1
1.9
3.2
5.3
2.1
2.3
2.3
Difference from baseline, percent of real GDP
4.8 MBD shock
-1.2
0.1
9.6 MBD shock
-3.0
0.3
0.2
0.4
Difference from baseline, billions of 2008$
4.8 MBD shock
-63.1
2.9
9.6 MBD shock
-156.0
14.1
9.2
22.6
GDP Growth (% per year)
Baseline
4.8 MBD shock
9.6 MBD shock
Domestic product prices, difference from baseline in percent
4.8 MBD shock
0.4
-0.2
-0.1
9.6 MBD shock
0.6
-0.6
-0.5
Employment, difference from base in thousands
4.8 MBD shock
-779
-126
9.6 MBD shock
-2153
-280
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2 0 1 0 Climate & Ener gy Symposium
79
172
European Union
European Union
2009
2010
2011
1.5
0.9
0.1
1.5
2.0
2.7
1.8
1.9
2.1
Difference from baseline, percent of real GDP
4.8 MBD shock
-0.5
-0.1
9.6 MBD shock
-1.3
-0.1
0.1
0.1
Difference from baseline, billions of 2008$
4.8 MBD shock
-105.2
-13.0
9.6 MBD shock
-259.7
-25.2
11.7
25.6
GDP Growth (% per year)
Baseline
4.8 MBD shock
9.6 MBD shock
Domestic product prices, difference from baseline in percent
4.8 MBD shock
0.6
0.4
0.3
9.6 MBD shock
1.6
1.2
1.0
Employment, difference from base in thousands
4.8 MBD shock
-524
-428
9.6 MBD shock
-1184
-1008
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224
450
Interindustry-Macroeconomic (IM) Models
•
Combines industrial structure with econometric equations in a dynamic and
detailed general equilibrium framework.
– Sectoral detail.
– Macroeconomy.
– Useful for questions involving interactions between industries, as well as
the interplay between industry and macroeconomic relationships.
•
Solve for economy year by year; time path of response is important. Effects
of shocks build up and decay over time. Production technology changes
over time, in response to estimated trends or exogenous assumptions.
•
U.S. model is Lift (Long-term interindustry forecasting tool). Under
continuous development and use for over 30 years.
•
International System: Bilateral trade model, IM models for all major trade
partners including China.
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