Oil Prices and the Global Economy. Steven B. Kamin Federal Reserve Board March 10, 2008

Transcription

1 Oil Prices and the Global Economy Steven B. Kamin Federal Reserve Board March 10,

2 Outline of talk Potential effects of rising oil prices on inflation and economic activity Address why effects have been more benign in 2000s than in 1970s Effects of rising oil prices on external imbalances Implications for global capital flows, financial markets, and asset prices 3 I. Potential Effects of Oil Prices on Inflation and Growth 4

3 Effect depends on what pushes up oil prices Demand shock: Rising demand for oil Supply shock: Exogenous decline in oil production Assume shock is exogenous supply cut Supply shocks boost prices, contract economic activity 5 How an oil shock boosts prices Energy key production input Higher energy costs raise overall production costs 6

4 How an oil shock depresses output Raises costs and lowers profits Uncertainty about future costs lowers investment Shifts income away from oil-importing importing countries Spending falls more in oil-importing importing countries than it rises in oil-exporting countries Authorities tighten monetary policy to restrain inflation Induces shift in consumption patterns 7 II. What s s Changed Since the 1970s? 8

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8 15 Late 2004 Federal Reserve (then) Governor Ben Bernanke: $85 billion increase in imported energy costs Reduced U.S. real GDP growth of ½ to ¾ percentage point 16

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11 21 What explains better performance of global economy in 2000s? 22

12 What explains better performance of global economy in 2000s? 1. Change in nature of shock 1970s: exogenous supply shock 2000s: demand shock reflecting economic growth 23 Caveats: Simplification to say 1970s represented wholly exogenous supply shock, 2000s represented wholly endogenous demand shock. 24

13 25 Caveats: Economic growth and demand for oil not uniformly spread around the globe. 26

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15 Economic growth and demand for oil not uniformly spread around the globe. In principle, demand shock for Asia could have represented supply shock for others

16 Economic growth and demand for oil not uniformly spread around the globe. In principle, demand shock for Asia could have represented supply shock for others. In practice, developing Asia growth dependent on solid world-wide wide growth. 31 Caveats: Switch from (largely) supply shock in 1970s to (largely) demand shock in 2000s cannot explain why inflationary response to higher oil prices so much lower in second period. In principle, higher oil prices should have been inflationary in both periods. 32

17 What explains better performance of global economy in 2000s? 2. Lower oil-intensity intensity of global production in the 2000s 33 34

18 35 What explains better performance of global economy in 2000s? 3. Better economic fundamentals in the 2000s More aggressive central bank focus on price stability better anchored inflationary expectations lower inflationary response to oil shocks less need for monetary tightening Better growth performance 36

19 What explains better performance of global economy in 2000s? 3. Better economic fundamentals in the 2000s More flexible labor markets and real wages Wages rise by less in response to oil shocks Reduced inflationary impetus Reduced need to tighten monetary policy 37 What explains better performance of global economy in 2000s? 3. Better economic fundamentals in the 2000s Improved growth environment 38

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21 What explains better performance of global economy in 2000s? 1. Change in nature of shock 2. Lower oil-intensity intensity of global production in the 2000s 3. Better economic fundamentals in the 2000s All 3 explanations complementary, plausible 41 III. Oil Prices and External Imbalances 42

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25 IV. Oil Prices and Global Capital Flows 49 IV. Oil Prices and Global Capital Flows 1. Prospects for disorderly correction 2. Contributions to global saving glut and lower interest rates 3. Sovereign wealth funds 50

26 51 1. Disorderly correction scenario Concerns about deficit induce: run on the dollar increases in interest rates declines in stock prices U.S. economic slowdown Drags down growth of U.S. trading partners, too 52

27 1. Disorderly correction scenario Research indicates disorderly correction scenario not common in industrial economies External adjustments more likely to be caused by, than to cause, economic slowdowns U.S. current account deficit has been narrowing 53 54

28 2. Contribution to global saving glut Bernanke (2005): Large developing- economy current account surpluses boost global supply of savings Contributed to current account deficits in industrial countries, including U.S. Contributed to lower interest rates around the world Helps explain Alan Greenspan s conundrum :: low interest rates in a setting of economic recovery and tightening monetary policy

29 2. Contribution to global saving glut Guesstimating effect of oil surpluses in lowering interest rates: Warnock and Warnock (2005): foreign purchases of U.S. bonds lowered U.S. treasuries by some 150 basis points How much of those purchases accounted for by oil exporters? No clear idea where oil surpluses being invested. 57 Exhibit 30 Source: BIS Quarterly Review 58

30 2. Contribution to global saving glut Guesstimating effect of oil surpluses in lowering interest rates: Warnock and Warnock (2005): foreign purchases of U.S. bonds lowered U.S. treasuries by some 150 basis points How much of those purchases accounted for by oil exporters? No clear idea where oil surpluses being invested. Instead, apply share of total global saving glut accounted for by oil exporters about ½ Ball park estimate: 150 * ½ = 75 basis points Sovereign Wealth Funds SWFs: public sector entities investing public funds in international assets Designed to achieve higher returns than investments in highly liquid assets such as foreign exchange reserves. Total assets estimated at $2-3 3 trillion Of which oil exporters may account for over two thirds 60

31 Exhibit Sovereign Wealth Funds Difficult to identify prominent effects of SWFs on global economy or financial system Total value still only some 2% of global debt and equity securities Conservative, low-profile investment strategies Avoided large/abrupt shifts in portfolios Recent investments in global banks apparently stabilizing 62

32 3. Sovereign Wealth Funds Concerns focus on potential future problems Lack of transparency Political vs. economic motives Call for guidelines on operations and conduct 63 Conclusion Important but limited effects of recent runup in oil prices on global economy Boosted inflation rates Weighed on economic growth Smaller effects than in 1970s Current oil prices consequence of rapid economic growth Global economy less dependent on oil Fundamentals of global economy are stronger 64

33 Conclusion Effects on external imbalances, capital flows, and financial system also limited No evidence that widening imbalances leading to disorderly correction. Global saving glut probably has reduced interest rates, but by how much and to what effect is uncertain. Investment by sovereign wealth funds a necessary part of the process of recycling petrodollars. Concern about lack of transparency 65