Download Commodity price increases: causes, effects and policy responses

Commodity price increases: causes,
effects and policy responses
G20 Conference on Commodity Price Volatility
Istanbul, 13th September 2011
Jonathan Coppel
Economic Counsellor to the OECD Secretary-General
1
Overview
• Why high and volatile commodity prices are
an issue?
• What have been recent trends in commodity
prices?
• Driving forces of high prices and volatility
• What are the macroeconomic impacts of
high commodity prices?
• Macroeconomic policy responses
Commodity prices
Why be concerned by high commodity
prices and volatility?
• Price level and movements inform production and
consumption decisions
• But excessive volatility:
– Is a source of uncertainty and risk
– Impacts on rate of return, investment decisions
and rate of growth
– Economic stability and macroeconomic
management
– Food and energy security
• Key issue is whether commodity price volatility is
excessive
Commodity prices
Commodity price developments
• Oil price near record levels in nominal and real
terms, in dollar terms and in other currencies.
• Some fall back in oil prices recently, but above
historical average past 30 years.
• Current levels are consistent with a longer term
trend observed since the start of the decade.
• Prices for other commodities exhibit a similar
pattern.
• OECD/FAO outlook expects higher prices for most
commodities.
All commodity prices are at or near recent
historic peaks
Index: Jan 2000 = 100; US$ per barrel
350
160
Agricultural raw materials
300
Food
140
Metals and minerals
Commodity prices
Oil $US (right scale)
120
250
100
200
80
150
60
100
40
50
0
2000
20
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: OECD Main Economic Indicators; and Datastream.
5
Driving forces
Factors explaining energy commodity
price movements
Emerging Market
Economies
Advanced Market
Economies
Demand side
 High GDP growth
 High energy intensity
 Some capped retail
prices
 High income elasticity
 Low GDP growth
 Price elastic
Supply side
 Low supply response
 Long lags between
investment decision and
production
 Low long term interest
rates
 Shortage of qualified
labour
 Geopolitical risk
Low supply response
 Long lags between
investment decision and
production
 Low long term interest
rates
 Shortage of qualified
labour
 Geopolitical risk
 Declining production in
conventional fields
Commodity price volatility
Is commodity price volatility excessive?
• Statistical benchmarks depends on:
– Time period chosen
– The frequency of the data
– The measure of volatility
– Price data used
• The jury is still out
Commodity price volatility
Commodity price volatility
Nominal Annualised Historic Volatility
1957 - 2010
Source: OECD-FAO Agricultural Outlook 2010-2019
Commodity price volatility
Is commodity price volatility likely to
increase?
Upside factors
• Deregulation of energy
and agricultural markets
that expose producers and
consumers to world prices
• Low stock levels
• Closer links between
energy and food markets
• Production moving to less
resilient areas and
marginal sources
• Increased frequency of
extreme events
Downside factors
• New technology increasing
resilience of crops and
lowering marginal cost of
energy extraction
• More open trade leading
to less thin markets
• Better information flows
Macroeconomic impacts
What are the macroeconomic
impacts of commodity price
increases?
• Direct impact on prices, which varies by
region
– e.g. $10 increase in oil adds 0.4% US, 0.1% Japan
– Food price hikes have bigger effects in EMEs
• Higher core inflation
• Risk of adding to inflation expectations
– Little sign of higher inflation expectations, though
some metrics may be distorted
Macroeconomic impacts
Energy and food prices and inflation
When oil price peaked in 2008 Q2, effect on inflation around 1.3 % points
in US and Japan
Contribution to year-on-year inflation rates
Source: Bureau of Economic Analysis; Eurostat; OECD, Main Economic Indicators.
Macroeconomic impacts
What are the macroeconomic
impacts of commodity price
increases?
• Short term demand driven effects on output
• Size also varies by region, depending on
intensity of use, wage behaviour and policy
– e.g. $10 increase in oil reduces GDP by 0.3% in
US and Japan and 0.2% in Europe
• Sustained higher prices lower potential output
– $30 increase could lower GDP by 1%
• Volatility can also lower potential output
Macroeconomic impacts
Impacts on global imbalances
About 40% of the OECD area’s additional payments for oil imports
return in the form of additional exports to the oil producers
Most of the additional demand is within first year
Additional exports to oil producers per additional imports from oil producers,
accumulated 2002-2010
Source: OECD, Monthly Statistics of International Trade; and OECD calculations.
Policy responses
Macroeconomic policy responses
Monetary Policy
• Increase in global demand, drives a higher relative price,
which MP should accommodate
• If persistent and impact on inflation expectations , MP
should react
Fiscal Policy
• When supply is fixed, demand must adapt via higher prices.
Fiscal interventions are powerless at the global level
• For food, supply is more elastic, giving more scope to
alleviate price hikes
• Humanitarian grounds are more compelling for food than
energy
Commodity price increases: causes,
effects and policy responses
G20 Conference on Commodity Price Volatility
Istanbul, 13th September 2011
Jonathan Coppel
Economic Counsellor to the OECD Secretary-General
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