Energy and the Economy:
The Macroeconomic Impact
Shelton Nicholls
Deputy Governor
UWI Conference on the Economy
October 8-9 2008
Central Bank of Trinidad and Tobago
Outline of Presentation
1. Energy Sector and the Macroeconomy:
Theoretical Perspectives
2. Energy Sector and Macroeconomic Linkages
3. Energy Sector and Macroeconomy : Some
Performance Measures
4. Macroeconomic Management
5. Current Risks in Global Environment
Central Bank of Trinidad and Tobago
1.0 Energy Sector and the Macroeconomy:
Theoretical Perspectives
•
Development is constrained by low levels of
investment. Access to capital and foreign exchange
from the energy sector could help to “push” or propel
growth. [Lewis, Rostow, Rosenstein-Rodan, Roemer]
•
Natural resource abundance can have a negative
impact on economic growth and development if not
managed optimally. [Auty, Gelb]
•
Riding the crest of the product cycle which may imply
deriving optimal benefits from the energy sector.
[Farrell]
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1.1 Key Issues from Theoretical Perspectives
• Dependence on energy can make economic
performance susceptible to economic shocks.
• Resource boom can result in a decline in the tradeable
sector and an expansion in the non-tradeable sector.
• Inflows of significant foreign exchange resources could
lead to real exchange rate appreciation and impact
competitiveness in the non-energy sector.
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2.0 Energy Sector and Macroeconomic Linkages
2.1
Macroeconomic Linkage Diagram
2.2
Main features of Linkages
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2.1 Macroeconomic Linkage Diagram
Oil & Gas Prices
Output
Energy GDP
Employment
Energy Exports
Non-Energy GDP
Non-Energy Exports
DOMESTIC
PRICES
Fiscal Sector
Consumption
Energy Revenue
Investment
Non-Energy Revenue
Overall Fiscal Balance
Non-Energy Balance
Oil & Gas
Reserves
Money/Financial Markets
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Monetary
Aggregates
2.2 Main features of Linkages
•
High energy prices in an environment of increasing
energy production raises export earnings and increases
tax revenues.
•
Increased tax revenues helps to bolster government
expenditure envelope.
•
Increased expenditure in tradeable sector could expand
investment, output and employment.
•
Expansion in non-tradeable activities could have
distortionary effects on investment, aggregate demand,
labour market and prices.
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3.0 Energy Sector and the Macroeconomy:
Some Performance Measures
3.1
Energy and National Output
3.2
Energy Sector and Trade
3.3
Energy Sector and Fiscal Accounts
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3.1.0 Energy Sector and Output
•
More diversified energy sector since onset of
first oil boom in 1970s.
•
Energy sector output continues to dominate
total output.
•
Energy sector employs a relatively small share
of the labour force.
Central Bank of Trinidad and Tobago
3.1.1 Distribution of GDP
1975
2008
Manuf 6.1%
Energy 42.1%
Energy
46.7%
Agri 4.9%
Manuf
5.3%
Services 46.9%
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Agri
0.3%
Services
47.7%
3.1.2 Distribution of Energy GDP
1975
Petrochemical
0%
2008
Petrochemical
17%
Oil & Gas
83%
Oil & Gas
100%
Central Bank of Trinidad and Tobago
3.1.3 Energy Output as a per cent of GDP
1975
1985
1995
2000
2005
2007
2008
44.1
26.7
27.5
31.3
41.7
45.8
46.3
Oil and Gas GDP/
Total GDP
44.1
26.7
15.9
22.9
34.8
32.9
33.8
Petrochemical GDP/
Total GDP
n.a.
n.a.
5.8
4.2
6.0
7.2
6.7
n.a.
n.a.
3.7
3.2
3.4
3.7
3.1*
Energy GDP/Total GDP
of which:
Memo
Energy Employment to
Total Employment
* Represents data for Q1 2008.
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3.1.4 Contribution of Tradeable and Nontradeable Sectors to Total GDP
1975
1985
1995
2000
2005
2007
2008
Agriculture
5.0
2.4
2.3
1.4
0.5
0.4
0.3
Manufacturing
6.3
7.3
8.2
7.1
5.3
5.8
5.2
Construction
7.6
11.2
7.8
7.5
7.4
8.3
9.4
Distribution
12.5
12.2
14.0
16.4
11.9
12.3
11.4
and Real Estate
6.9
12.1
12.3
14.2
11.6
10.9
11.1
Government
8.5
15.2
2.1
1.6
6.6
6.4
6.2
Other
12.8
17.5
24.1
21.1
10.6
9.5
9.2
TRADEABLE
NON-TRADEABLE
Finance, Insurance
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3.2.0 Energy Sector and Trade
•
Energy exports continue to dominate extra-regional and
intra-regional exports.
•
Sharp increases in energy prices in the new millennium.
•
Significant volatility exhibited in energy prices over last
four (4) decades.
•
Decade of 1970s: High energy prices resulted mainly
from supply side restrictions.
New millennium: Booming global demand, especially by
China and India, and increasing speculation contributed
largely to high energy prices.
Central Bank of Trinidad and Tobago
3.2.1 Contribution of Energy Exports
1975
1985
1995
2000
2005
2007
Energy Exports
/ Total
Exports
52.5
91.9
72.4
81.2
91.0
86.7
Energy Exports
to CARICOM
/ Total
Exports
3.6
8.6
9.7
13.1
16.4
8.6
Energy Exports
to NonCARICOM
/ Total
Exports
96.4
91.4
90.3
86.9
83.6
91.4
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16
140
14
120
12
Natural Gas - Henry Hub
(right axis)
100
10
80
8
60
6
40
20
Oil - WTI
(left axis)
0
4
2
0
Central Bank of Trinidad and Tobago
US$/mmbtu
160
19
8
19 3
8
19 4
8
19 5
8
19 6
8
19 7
8
19 8
8
19 9
9
19 0
9
19 1
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
0
20 2
0
20 3
0
20 4
0
20 5
0
20 6
0
20 7
08
US$/bbl
3.2.2 Energy and Gas Prices
3.2.2 Energy and Gas Prices
120
100
US$/bbl
80
60
40
Oil - WTI
20
10
9
7
6
5
4
Natural Gas Henry Hub
3
2
1
Central Bank of Trinidad and Tobago
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
0
20
00
US$/mmbtu
8
20
08
20
05
20
02
19
99
19
96
19
93
19
90
19
87
19
84
19
81
19
78
19
75
0
3.2.3 Real Effective Exchange Rate
(year-on-year changes)
15
10
per cent
5
0
-5
-10
-15
-20
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
-25
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3.3.0 Energy Sector and Fiscal Accounts
•
Energy revenue still accounts for a significant
proportion of government revenues.
•
Non-energy revenue has however been
increasing over time with the expansion in the
non-energy sector.
•
Heritage and stabilisation fund provides a
viable avenue for increased savings and for
lessening demand pressures.
Central Bank of Trinidad and Tobago
3.3.1 Energy Revenue and Expenditure
(in per cent of GDP)
1975
1985
1995
2000/2001
2006/2007
2007/2008
34.1
34.9
27.4
25.9
30.0
35.5
Energy Revenue
25.0
13.5
8.2
9.7
16.7
19.4
Non-Energy
Revenue
9.1
21.4
19.2
16.2
13.3
16.1
23.9
42.4
27.2
24.2
28.3
32.2
Recurrent
16.9
33.4
25.2
22.5
22.4
25.5
Capital
7.0
9.0
2.0
1.7
5.9
6.7
Overall Balance
10.2
-7.5
0.2
1.6
1.7
3.2
Non-Energy Balance
-14.7
-21.0
-8.0
-8.1
-14.9
-16.2
Total Revenue
Of which:
Total Expenditure
1.
2.
In 1997 the central government's reporting of the fiscal operations was changed from calendar year to fiscal year.
Energy revenue between 1975-2000 excludes receipts from petrochemical companies.
Central Bank of Trinidad and Tobago
3.3.3 Official Reserves, HSF and Import Cover
14
12
Heritage and
Stabilization Fund
10
8
6
Import Cover
Gross Official Reserves (months)
(In billion US$)
4
2
0
2000
2001
2002
2003
2004
2005
Central Bank of Trinidad and Tobago
2006
2007
Sep-08
4.0 Macroeconomic Management
•
Managing the existing buoyant economic
environment requires focused attention on:
1.
Expanding the absorptive capacity of the economy via
focus on expanding the non-energy tradeable sector
(agriculture, financial services, tourism).
2.
Managing rapid appreciation of the nominal and real
exchange rates so as to sustain competitiveness of the
economy.
Central Bank of Trinidad and Tobago
4.0 Macroeconomic Management
•
Managing the existing buoyant economic
environment requires focused attention on:
3.
Managing inflationary pressures arising from rapid
growth in aggregate demand.
4.
Investing additional energy resources to provide for
inter-generational
savings
and
to
smoothen
consumption.
Central Bank of Trinidad and Tobago
4.0 Macroeconomic Management
•
5.
Managing the existing buoyant economic
environment requires focused attention on:
Creating an enabling environment for private sector
investment:
– Provision of appropriate economic and social
infrastructure (education, health, physical
infrastructure).
– Maintaining a consistent and transparent policy
framework.
Central Bank of Trinidad and Tobago
5.0 Current Risks in Global Environment
•
Strong likelihood of slower economic growth
could dampen demand for energy and exert
downward pressure on oil prices.
•
Current financial market turmoil has already
depressed yields in global financial markets
and could lead to lower returns on financial
capital.
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END OF PRESENTATION
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