Emmanuel Barnedo Presentor • Introduction • Methodology • Conceptual Framework • Analytical Framework • Results and Discussion • Summary and Conclusion • Policy Implications • Limitations of the Study Analyzing the Macroeconomic Effects of Oil Price Changes in the Philippines “Crude oil and various petroleum product are crucial in literally fueling the economy of a nation… If blood is the lifeline of our body, then oil is the lifeline of the economy…” -Anakpawis Rep. Crispin Beltran (2008) Analyzing the Macroeconomic Effects of Oil Price Changes in the Philippines • During the oil crises in the 1970s, many countries, experienced recession (Lee and Chui, 2009; Barsky and Kilian, 2001). • In the 2000s, the Philippines proved once more that it was indeed vulnerable to the sustained increase in oil prices. • The real Gross Domestic Product (GDP) had declined considerably in 2007 until 2009 where oil prices had reached its peak in 2008. Analyzing the Macroeconomic Effects of Oil Price Changes in the Philippines • The main objective of this study is to analyze how changes in oil prices affect crude oil consumption and some key macroeconomic indicators in the Philippines. Analyzing the Macroeconomic Effects of Oil Price Changes in the Philippines • Specifically, the study aimed to accomplish the following: • To determine the effects of world and local oil price changes in oil consumption and key macroeconomic indicators, such as inflation rate, investment, employment and real Gross Domestic Product; • To examine the time of disruption brought about by the world and local oil price oil price shocks; Analyzing the Macroeconomic Effects of Oil Price Changes in the Philippines • Specifically, the study aimed to accomplish the following: (cont…) • To compare the effects of these shocks in terms of the pattern of disruption on the domestic oil consumption and the key macroeconomic indicators; and • Lastly, to provide policy implications to lessen the impact of oil price changes. Analyzing the Macroeconomic Effects of Oil Price Changes in the Philippines • • • • • Conceptual Framework Test of Stationarity Vector Autoregressive (VAR) Model Impulse Response Model Sources of Data Let: • World oil price changes be D.DBOIL; • Local oil price changes be D.DSOIL; • inflation be INF; • total oil consumption PPS; • investment be FCF; • total employment be EMP; and • Gross Domestic Product be GDP. • The Augmented Dickey Fuller (ADF) test is used. π ππ‘ = ππ ππ‘−1 + πΏπ βππ‘−π + ππ π‘=1 • β is the differencing operator; ππ is the white error term; and π and πΏ are the coefficients of the one period lagged value ππ‘−1 and βππ‘−π , respectively, where π π‘=1 βππ‘−π = βππ‘−1 + βππ‘−2 + β― + βππ‘−π (are higher order autocorrelation) such that n is the optimum lag length determined using sequential search method. π ππ‘ = ππ ππ‘−1 + πΏπ βππ‘−π + ππ π‘=1 Null Hypothesis: π = 1 (ππ‘ is non-stationary or there is a unit root) Alternative Hypothesis: π ≠ 1 (ππ‘ is stationary or there is no unit root) • It follows the same asymptotic distribution as the DickeyFuller test so the same critical values can be used. • Thus, if the computed absolute value of the tau statistic (|τ|) exceeds the Mackinnon critical tau values, reject the null hypothesis that π = 1, the series is stationary. Otherwise, fail to reject the null hypothesis, in such case, the series is non-stationary (Gujarati, 2004). • The augmented Dickey-Fuller tests for the variables under study are: π·. π·π΅ππΌπΏπ‘ = π1 π·. π·π΅ππΌπΏπ‘−1 + πΏ1 ππ‘=1 βπ·. π·π΅ππΌπΏπ‘−π + π1 π·. π·ππΏππΌπΏπ‘ = π2 π·. π·ππΏππΌπΏπ‘−1 + πΏ2 ππ‘=1 βπ·. π·ππΏππΌπΏπ‘−π + π2 πΌππΉπ‘ = π3 πΌππΉπ‘−1 + πΏ3 ππ‘=1 βπΌππΉπ‘−π + π3 ππππ‘ = π4 ππππ‘−1 + πΏ4 ππ‘=1 βππππ‘−π + π4 πΉπΆπΉπ‘ = π5 πΉπΆπΉπ‘−1 + πΏ5 ππ‘=1 βπΉπΆπΉπ‘−π + π5 πΈπππ‘ = π6 πΈπππ‘−1 + πΏ6 ππ‘=1 βπΈπππ‘−π + π6 πΊπ·ππ‘ = π7 πΊπ·ππ‘−1 + πΏ7 ππ‘=1 βπΊπ·ππ‘−π + π7 • If the variable is found to be nonstationary in level form, it must be stationarized thru differencing/detrending. • The first VAR model used in the study with p-lag is given by: ππ = πΆ + π π ππ−π + π π ππ−π + β― + π π ππ−π + πΊ π Where: ππ‘ = (π·. π·π΅ππΌπΏπ‘ , πΌππΉπ‘ , ππππ‘ , πΉπΆπΉπ‘ , πΈπππ‘ , πΊπ·ππ‘ ) denotes (nx1) vector of (stationary/stationarized) time variables series ; πΌ is (nx1) vector of drift terms, ππ is (nxn) coefficient matrix and π π‘ is (nx1) vector of white noise error term; and t=1,2,…,T; p=maximum no. of lags *No. of lags were determined using Akaike Information Criterion -A second VAR model was similarly specified for the local oil price changes by replacing the world oil price changes (π·. π·π΅ππΌπΏπ‘ ) with local oil price changes (π·. π·ππΏππΌπΏπ‘ ) VAR Model with world oil price changes π π π d.π πππππ = πΆπ + π=π π½ππ π . π πππππ−π + π=π πππ ππππ−π + π=π π·ππ ππππ−π + π π π πΉ πππ + π πππ + ππ π−π ππ π−π π=π π=π π=π πΈππ ππ ππ−π + πΊππ π π π π π π π π π ππππ‘ = πΌ2 + π=1 π2π π. ππππππ‘−π + π=1 π2π ππππ‘−π + π=1 π½2π πππ π‘−π + π π π πΏ πππ + π πππ + π‘−π π‘−π π=1 2π π=1 2π π=1 πΎ2π ππππ‘−π + π2π‘ πππ π‘ = πΌ3 + π=1 π3π π. ππππππ‘−π + π=1 π3π ππππ‘−π + π=1 π½3π πππ π‘−π + π π π πΏ πππ + π πππ + 3π π‘−π 3π π‘−π π=1 π=1 π=1 πΎ3π ππππ‘−π + π3π‘ ππππ‘ = πΌ4 + π=1 π4π π. ππππππ‘−π + π=1 π4π ππππ‘−π + π=1 π½4π πππ π‘−π + π π π πΏ πππ + π πππ + π‘−π π‘−π π=1 4π π=1 4π π=1 πΎ4π ππππ‘−π + π4π‘ π π π π π π ππππ‘ = πΌ5 + π=1 π5π π. ππππππ‘−π + π=1 π5π ππππ‘−π + π=1 π½5π πππ π‘−π + π π π πΏ πππ + π πππ + 5π π‘−π 5π π‘−π π=1 π=1 π=1 πΎ5π ππππ‘−π + π5π‘ ππππ‘ = πΌ6 + π=1 π6π π. ππππππ‘−π + π=1 π6π ππππ‘−π + π=1 π½6π πππ π‘−π + π π π πΏ πππ + π πππ + 6π π‘−π 6π π‘−π π=1 π=1 π=1 πΎ6π ππππ‘−π + π6π‘ • It traces the responsiveness of the dependent variable in the VAR system to a unit shock in error terms over time. • But the error term must be nonautocorrelated (and normally distributed) so that shocks can be represented independently. Thus, non-autocorrelation and normality of the distribution must be ensured first. • The impulse response functions for this study are given as follows: ππππ‘ = πΌ1 + π0 π€π1π‘ + π1 π€π1π‘−1 + π2 π€π1π‘−2 + β― + ππ π€π1π‘−π + π1 πππππ‘ = πΌ2 + πΏ0 π€π1π‘ + πΏ1 π€π1π‘−1 + πΏ2 π€π1π‘−2 + β― + πΏπ π€π1π‘−π + π2 ππππ‘ = πΌ3 + π0 π€π1π‘ + π1 π€π1π‘−1 + π2 π€π1π‘−2 + β― + ππ π€π1π‘−π + π3 ππππ‘ = πΌ4 + π0 π€π1π‘ + π1 π€π1π‘−1 + π2 π€π1π‘−2 + β― + ππ π€π1π‘−π + π4 ππππ‘ = πΌ5 + π0 π€π1π‘ + π1 π€π1π‘−1 + π2 π€π1π‘−2 + β― + ππ π€π1π‘−π + π5 • The effects of such shock upon the VAR model over time are graphed up to (k-1) lags with its confidence band. • A second set of IRFs was also specified for local oil price changes whose error terms were represented by ππ1π‘ , ππ1π‘−1 , ππ1π‘−2 , … , ππ1π‘−π . • The study covered the period 1991Q1- 2010Q4. The variables included in the study were: • • • • • • • oil prices of Dubai Fateh (DBOIL) - IMF pump prices for diesel oil (DSOIL) - DOE inflation rate (INF) - NSO petroleum products sales (PPS) - DOE fixed capital formation (FCF) - NSCB total employed people (EMP) - NSO Gross Domestic Product (GDP) - NSCB • There were some adjustments and estimations made, such as: • oil prices of Dubai Fateh (DBOIL); and • quarterly data for petroleum product sales Augmented Dickey-Fuller tests Level Form Optimal Variables • There were some adjustments and estimations Lag t-stat p-value made, such as: a length • oil prices of Dubai Fateh (DBOIL); b d.dboil 1 -10.505 stationary • the first difference (ππ‘ − ππ‘−1 ) of0.0000* DBOIL and DSLOIL b d.dsloilwas 2 -5.982 0.0000* in world stationary taken/used to represent change oil and local oil price and PPS price (D.DBOIL) 2 -2.684 0.0769(D.DSLOIL); nonstationary petroleum product INF • quarterly2 data for-6.143 0.0000* sales stationary EMP 2 -0.488 0.8943 nonstationary FCF 1 -2.603 0.9814 nonstationary GDP 2 0.398 0.9814 nonstationary a Optimal lag length was determined through sequential search method. * represents significant at 5% level. Augmented Dickey-Fuller tests Adjusted Variables Variables s4.ppsc s4.fcfc detrend_empd s4.gdpc (with drift) Optimal Lag lengtha t-stat p-value 1 1 1 1 -3.522 -3.487 -3.156 -2.511 0.0075* 0.0083* 0.0227* 0.0072* Optimal lag length was determined through sequential search method. b Adjusted using first difference (π − π π‘ π‘−1 ) to represent βπ. c Adjusted using fourth seasonal differencing (π − π π‘ π‘−4 ). d Adjusted using detrending approach. * represents significant at 5% level. a stationary stationary stationary stationary • According to the Akaike Information Criterion (AIC), the optimal lag length for the first VAR model was three (3) while the second was two. Effect(s) of World Oil Price Shock Effect(s) of Local Oil Price Shock dslshock2: D.dsloil -> inf dbshock3: D.dboil -> inf .6 .4 .4 .2 .2 0 0 -.2 -.2 0 10 95% CI 20 step 30 impulse response function (irf) 40 0 10 95% CI 20 step 30 impulse response function (irf) • The initial reaction of inflation was positive that may be attributed to the direct and indirect effect(s) of an oil price shock. 40 Effect(s) of Local Oil Price Shock Effect(s) of World Oil Price Shock dbshock3: D.dboil -> S4.pps dslshock2: D.dsloil -> S4.pps 200 0 0 -100 -200 -200 -400 -300 0 10 95% CI 20 step 30 impulse response function (irf) 40 0 10 95% CI 20 step 30 40 impulse response function (irf) • Crude oil was said to be relatively inelastic. However, the significant decline in oil consumption also signalled that it was becoming less inelastic over time Effect(s) of World Oil Price Shock Effect(s) of Local Oil Price Shock dbshock3: D.dboil -> S4.fcf dslshock2: D.dsloil -> S4.fcf 500 1000 500 0 0 -500 -1000 -500 0 10 95% CI 20 step 30 impulse response function (irf) 40 0 10 95% CI 20 step 30 impulse response function (irf) • The initial increase in investment on energy-efficient capital may be relatively higher compared to the decrease (or postponement) in the investment on other capital. 40 Effect(s) of World Oil Price Shock Effect(s) of Local Oil Price Shock dslshock2: D.dsloil -> detrend_emp dbshock3: D.dboil -> detrend_emp 50 50 0 0 -50 -50 -100 -100 0 10 95% CI 20 step 30 impulse response function (irf) 40 0 10 95% CI 20 step 30 40 impulse response function (irf) The slow recovery of employment may be attributed to: (1) the industry-specific skills of labor (Loungani 1986) and (2) increase in investment . Effect(s) of World Oil Price Shock Effect(s) of Local Oil Price Shock dslshock2: D.dsloil -> S4.gdp dbshock3: D.dboil -> S4.gdp 1000 500 500 0 0 -500 -500 -1000 0 10 95% CI 20 step 30 impulse response function (irf) 40 0 10 95% CI 20 step 30 impulse response function (irf) The increase in GDP may be attributed to the increase in investment. Such increase may have reduce the negative impact on energy-intensive sectors, such as transport 40 • Conclusion • Policy Implication(s) • Limitation(s) of the Study Variables inf A + B - C 0.304 D 0.089 s4.pps - n.a. 273.138 n.a. s4.fcf + - 575.947 469.056 detrend _emp s4.gdp - n.a. 40.089 n.a. + - 661.222 622.406 E 14 Quarters 6 Quarters 15 Quarters 16 Quarters 16 Quarters F 0.246 G 0.037 151 n.a. 49 219.636 31.211 n.a. 150 359.379 H 11 Quarters 9 Quarters 12 Quarters 14 Quarters 20 Quarters A- Initial Response to the Oil Price Shock (the same for both) B- Second Response to the Oil Price Shock (the same for both) C- Magnitude of the Initial response (Max Value) (World Oil Price Changes) D- Magnitude of the Second Response (Max Value) (World Oil Price Changes) E- Length of Disruption of the World Oil Price Shock F- Magnitude of the Initial response (Max Value) (Local Oil Price Changes) G- Magnitude of the Second Response (Max Value) (Local Oil Price Changes) H- Length of Disruption of the Local Oil Price Shock • Although oil price shocks were found to be disruptive, regulating the oil downstream industry could create more distortions. • Since the said shock is temporary, the government can implement short-term intervention, catered specifically to particular sector. Analyzing the Macroeconomic Effects of Oil Price Changes in the Philippines • As a long term solution, the government should promote the investment on energy-efficient technology/capital and the production of indigenous energy sources. Analyzing the Macroeconomic Effects of Oil Price Changes in the Philippines • Non-availability of quarterly data for oil consumption • The use of diesel oil price Analyzing the Macroeconomic Effects of Oil Price Changes in the Philippines End of presentation Thank you very much!