Download Addressing the impact of the decreasing oil price on

Issue:
Forum:
Position:
Name:
Addressing the impact of decreasing
oil price on countries depending heavily
on oil export
Economic and Social Council
Deputy Chair
Elif Koç
Introduction
Oil consumption in The global oil market and its associated booms and busts because of the
general trend for oil consumption in both developed and underdeveloped countries. In fact,
political instability is a near-certain, long-term outcome of oil wealth. Another line of
argument is just the opposite, that oil makes authoritarian regimes stronger by funding
patronage and repressive apparatuses as can be seen the most of OPEC countries.
In this research report, we will elaborate more on these arguments and investigate the
effects of oil wealth and the oil booms and busts on political stability. Lower oil prices should
translate into higher spending and therefore support global growth. The size of the impact
will depend on the underlying drivers of the price decline, the extent of pass-through to
households and firms and how much of it they spend, and policy responses. Although oil
price gains and losses across producers and consumers sum to zero, the net effect on
global activity is positive.
The speed and magnitude of the oil price decline has the potential to trigger financial
strains, which could reduce the global benefits of lower oil prices, although the effects have
so far been contained. Countries and companies dependent on oil revenues have already
been significantly re-priced, especially those with existing vulnerabilities, but the impact may
not yet have been fully felt. In particular, a number of energy firms accumulated sizable debt
during the period of high oil prices, and some banking systems saw a marked increase in
loan exposures to the energy sector.
Definition of Key Terms
Inflation
A persistent, substantial rise in the general level of pricesrelated to an increa
se in the volume of money and resulting in theloss of value of currency
Commodity
An article of trade or commerce, especially a product as distinguishedfrom a
service.
Boom and Bust
Haarlem Model United Nations 2017
Research Report
A boom and bust cycle is a process of economic expansion and contraction that occurs
repeatedly. The boom and bust cycle is a key characteristic of today’s capitalist economies.
During the boom the economy grows, jobs are plentiful and the market brings high returns to
investors. In the subsequent bust the economy shrinks, people lose their jobs and investors
lose money. Boom-bust cycles last for varying lengths of time; they also vary in severity
GDP - GNP
Gross domestic product (GDP) is the monetary value of all the finished goods and services
produced within a country's borders in a specific time period. Though GDP is usually
calculated on an annual basis, it can be calculated on a quarterly basis as well. GDP
includes all private and public consumption, government outlays, investments
and exports minus imports that occur within a defined territory. Put simply, GDP is a
broad measurement of a nation’s overall economic activity.
Reserve
An estimate of the amount of crude oil located in a particular economic region. Oil reserves
must have the potential of being extracted under current technological constraints. For
example, if oil pools are located at unattainable depths, they would not be considered part of
the nation's reserves. Saudi Arabia, Kuwait, Iran, Iraq, Venezuela, Russia, Mexico and
Canada are some of the world leaders in oil reserves. Canada has over 150 billion barrels of
oil reserves, a large portion of which is concentrated in the Alberta oil sands. If the rate of
technological improvement exceeds the rate of extraction, national oil reserves will
increase.
General Overview
Historically, in a context of unevenly distributed global reserves and very different structure
of extraction costs, varying expectations of demand and supply have led to a high volatile
price pattern. The oil price experienced a gradual grimp from 2004 to 2007 crisis, mainly
boosted by the growing demand from fast-growing economies in Asia and beyond.
After a sharp decline in 2008, prices went up to a relatively stable price thanks to the global
stability in finance and energy sector. The oil price plummeted again from mid-2014
onwards. Since then, prices have been slowly going up to an average of about 35$.
Supply factors have played a somewhat larger role than demand factors in driving the
50 percent drop in the price of oil between mid-2014 and early 2015. Higher oil production
resulted partly from non-OPEC developments (especially U.S. shale), but also higher-thanexpected OPEC output in countries such as Iraq, Libya, and Saudi Arabia. Demand was
weaker than expected in Europe and Asia. While increased financial flows into oil in recent
years may have contributed to increased volatility of oil prices, it is hard to find clear
evidence of speculative forces or financialization driving the price decline. Weaker demand
and substitution effects have pushed down prices of other energy commodities.
The oil price outlook is highly uncertain, but a substantial part of the oil price decline is
expected to persist into the medium term. Futures markets imply an increase in Brent oil
prices to some $75 a barrel in 2020, but recent experience—including the Brent price rally to
about $65 a barrel in April—suggests there may be considerable volatility around this
upward trend. The IMF uses futures contracts for its baseline assumptions for oil prices.
Haarlem Model United Nations 2017
Research Report
There is no simple alternative to futures for price forecasting at this stage; institutions using
models missed the large price drop as well.
An alternative supply-demand model being developed by IMF staff also points to gradually
higher oil prices over the longer term—needed to ensure sufficient investment in production
capacity to meet growing demand—but there is a very wide range of uncertainty.
The main drivers that have led to the present low oil prices include the weakening of
demand growth from some large Asian importers, the availability of new resources the
strategic behavior of some large-reserve / low cost producers, the appreciation of the US
Dollar, and the anticipation of emerging technologies seen as possible substitutes of oil in
the transport sector.
Most oil exporters from Middle-East and Africa have marginal production costs lower than
current oil price. Thus, their production level could be largely maintained if the price is not to
decrease further.
Major Parties Involved
IMF
The recent plunge in oil prices has brought into question the generally accepted view that
lower oil prices are good for the United States and the global economy. IMF uses a quarterly
multi-country econometric model to show that a fall in oil prices tends relatively quickly to
lower interest rates and inflation in most countries and increases global real equity prices.
The effects on real output are positive, although they take longer to materialize (around four
quarters after the shock). We then re-examine the effects of low oil prices on the U.S.
economy over different sub-periods using monthly observations on real oil prices, real equity
prices and real dividends.
World Bank
The World Bank does thorough and international research on the effects of oil prices in
countries. For instance, IMF recently stated that raising its 2017 forecast for crude oil prices
to $55 per barrel from $53 per barrel as members of the Organization of the Petroleum
Exporting Countries (OPEC) prepare to limit production after a long period of unrestrained
output.
Energy prices, which include oil, natural gas and coal, are projected to jump almost 25
percent overall next year, a larger increase than anticipated in July. The revised forecast
appears in the World Bank’s latest Commodity Markets Outlook.
OPEC
Organization of the Petroleum Exporting Countries (OPEC) aims to coordinate and unify the
petroleum policies of its member states and ensure the stabilization of oil markets in order to
secure an efficient, economic and regular supply of petroleum to consumers, a steady
income to producers and a fair return on capital for those investing in the petroleum industry.
Timeline of Key Events
July 2008
Prices were approaching $150/bbl, but had plummeted to below
Haarlem Model United Nations 2017
Research Report
2011
November 2014
2013
$50/bbl by the end of the year. This dramatic price collapse was in
response to severe recession in many countries.
The fall proved to be temporary and oil prices were back up
above $100/bbl
Citibank estimated that supply was exceeding demand by 700,000
barrels per day (bpd). This resulted in a build-up of oil inventories.
Total European crude oil consumption fell enormously.
Previous attempts to resolve the issue
The important role of crude oil in the global economy has attracted a great deal of attention
among politicians and economists. Researchers have focused on studying the impacts of
crude oil price shocks mainly within developed, net oil-importing economies.
Oil price shocks may have a different impact depending on countries' sectoral compositions,
their institutional structures and their economic development. Researchers have focused on
analyzing the relationship between oil price changes and macroeconomic variables such as
output growth, employment, wages and inflation.
Industrial economies :There are several studies addressing the question of whether there is
a relationship between oil price shocks and macroeconomic key variables. Regarding the oil
production, the competitive ability of the private sector was reduced and the industrial sector
experienced a setback from which it took many years to recover.
Changes in oil prices Granger-caused changes in unemployment and GNP in the US
economy. For several industrial countries, oil price shocks have a significant negative
impact on industrial production. However, oil price changes have different impacts on
economies over time. It seems evident that the effects of oil price movements have
weakened during the eighties. The main reasons behind the weak response of economies in
recent years is smaller energy intensity, a more flexible labor market, and improvements in
monetary policies. decreases.
The positive oil price changes have a strongly negative and significant relationship with
changes in real GNP while negative oil price changes exhibit no significant effects.
Possible Solutions
Several Sub-Saharan African and North African countries show high exposure of
the economy to the oil market. Combined with limited Sovereign Wealth Funds and
reserves per capita, this high dependency of Government budget to oil price make these
countries very vulnerable.
Secondly, the macro-economic effects of a fall in the price of oil is analyzed with the
GEM-E3 model. Previously, two scenarios were applied:
i)
ii)
"Baseline" scenario in which the price of oil is US$ 100 per barrel and
"60% scenario" in which the price of oil is US$ 40 per barrel.
The results show that an oil price drop has different effects on oil exporting
countries, and is strongly correlated with import dependence. Thus, countries where the
Haarlem Model United Nations 2017
Research Report
share of oil in total exports is very high are more vulnerable to lower oil prices. A 60%
fall in the price of oil could lead the GDP of Sub-Saharan Africa to decline by around
8.5%.
Crude oil producers (de facto Saudi Arabia, the historical swing producer) may decide to
tighten the oil supply in order to bring the price to higher levels. Other governments may
decide to increase or decrease public spending or their tax rates.
Haarlem Model United Nations 2017
Research Report
Appendix/Appendices
http://s3.amazonaws.com/academia.edu.documents/33159960/1bd8a08e66b3c888a88a4812e
ceec8b5.pdf?AWSAccessKeyId=AKIAJ56TQJRTWSMTNPEA&Expires=1483723266&Sig
nature=cnTnTYNjhWTlWs87EHM8VOQqNns%3D&response-contentdisposition=inline%3B%20filename%3DEnergy_consumption_and_economic_growth_T.pdf
Bibliography
Baumeister, C., and Kilian L. (2016). Understanding the Decline in the Price of Oil since
June 2014. Journal of the Association of Environmental and Resource Economists, 3(1),
March 2016, 131-158.
Berument, M. H., Ceylan, N.B. and N. Dogan. (2010). The impact of oil price shocks on
the economic growth of selected MENA countries, The Energy Journal, 149-176.
van den Beukel, J. (2016). Why the new Saudi oil policy is likely to succeed
(25/01/2016). Energy Post. Last access: 18/03/2016 BGR (2014).
Energy Study 2014. Reserves, resources and availability of energy
resources (18). – 131 pp, Hannover.
Bloomberg Business (2016a). Here’s How Electric Cars Will Cause the Next Oil Crisis
(25/02/2016). Last access: 24/03/2016
Bloomberg Business (2016b). Oil Security Seen at Risk by IEA on `Historic' Spending
Cuts (23/03/2016). Last access: 24/03/2016
Haarlem Model United Nations 2017
Research Report