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ENERGY AND SUSTAINABLE DEVELOPMENT
Impact of the Oil Shocks:
Transmission Channels and Models for Impact Evaluation
Cristina Mocci
Italian Ministry of Economy and Finance
cristina.mocci@tesoro.it
UNESCO
Rome, 2006 4th December
Impact of Oil Shocks
Outline
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
Impact of the Oil Shocks (1)
Impact of the Oil Shocks (1) – Oil shock’s scenarios
 Oil shock’s scenarios
Cristina Mocci – Impact of the Oil Shocks
The sources of oil shocks
Demand driven shocks
Demand grows in markets with a limited oil spare
production, transport and refining capacities.
As consequence, demand/supply disequilibrium and
price pressure
Supply driven shocks
Real 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
Determinants of oil shocks
Accelerating
Global Demand
Low Non-OPEC
Supply Growth
OPEC Spare
Capacity
Reduced
Bottlenecks in
Downstream
Accelerated
rise in oil
prices
Global oil
system’s
ability to
respond to
shocks
weakened
History of Low
Investment
Impact of shocks
magnified in
absence of spare
capacity
Cristina Mocci – Impact of the Oil Shocks
- Geopolitical
- Production losses
- Speculators
Volatility in
oil prices
Occasional
spikes in oil
prices
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 effects
More 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
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
efficient technologies
of oil
Balance negative effects of oil shocks on termsof-trade
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 Models
Spreadsheet 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’ Features
Treatment of a large number of
macroeconomic variables and historical
data
Utilization of the main achievement of
economical theory
Treatment of global economy
Development 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 confidence
Risks of wider difficulties in oil-importing
market economies having weak financial
situations often under-evaluated
Deterministic 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)
Impact of the Oil Shocks (4)
 The Oxford Energy Model (OXEMOD)
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-2
Interactions among the macroeconomic system
and energy demand, supply and prices are
modeled
Likely monetary policy reaction to shocks are
included
The 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 USA
These 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 applied
A larger output from producer countries can
compensate the production cut in the limit of
available spare capacity
Stocks limit the impact in the short term
Prices 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 Change
Price variations are exogeneously
applied
In the short run stocks increase to
compensate demand fall
OPEC reduces production while nonOPEC 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 ?
Cristina Mocci – Impact of the Oil Shocks