Effects Of Higher Oil Prices Research Articles

World Economic Prospects Monthly

Economic OutlookVolume 41, Issue s2 p. 1-36 Articles World Economic Prospects Monthly First published: 15 February 2017 https://doi.org/10.1111/1468-0319.12267AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Abstract Overview: A recovery in trade ▀ Our world GDP growth forecasts are unchanged this month, at 2.6% for 2017 and 2.9% in 2018. Similarly, our outlook for inflation has remained stable and we expect consumer price inflation to accelerate to 3.3% in 2017 owing to the effect of higher oil prices. Despite the multi-year highs shown by global surveys, we remain cautious about further upgrades to our growth forecast, as we believe that the they may be overstating the pace of growth. ▀ Global indicators continue to point to a pick-up in activity, driven by stronger manufacturing. The global manufacturing PMI remained at its highest level in almost three years in January, while the composite index – which includes services – was at a 22-month high. Underpinned by stronger manufacturing activity, global trade is also recovering, with trade volumes rising a strong 2.8% on the month in November. ▀ After a disappointing 2016, we expect US growth to rise to 2.3% from an estimated 1.6%, bolstered by the anticipated effects of President Trump's expansive fiscal policies. However, uncertainties around our central forecast are unusually high given the major doubts about the new president's policies. The first days of the Trump administration have shown that he does not intend to tone down his rhetoric and we believe there is risk of a general underestimation of the economic risks derived from protectionism and his anti-immigration stance. ▀ We still expect two increases in the Federal funds rate this year and US bond yields are likely to continue to rise. Despite some recent dollar weakness, the widening of interest rate differential between the US and the Eurozone, where rates are likely to remain unchanged, will drive the euro down to parity with the US dollar by end-2017. ▀ Emerging market growth overall will improve in 2017, but performance will differ across countries. Countries with weak balance of payments positions, high dollar debt and exposure to possible US protectionist actions will be at risk. Our research shows that Turkey, South Africa and Malaysia are most at risk from potential financial turmoil. Volume41, Issues2February 2017Pages 1-36 RelatedInformation

World Economic Prospects

Overview: A world with higher inflation Our world GDP growth forecasts are unchanged this month, at 2.6% for 2017 and 2.9% in 2018. But we expect a sizeable increase in inflation, to 3.3% in 2017 from an estimated 2.8% in 2016, as the effect of higher oil prices feeds through. Global indicators continue to point to a pick‐up in activity towards the end of last year, driven by stronger manufacturing activity. The global manufacturing PMI rose to the highest level in almost three years in December, while the composite index – which includes services – was at a 13‐month high. World trade should be underpinned by stronger growth in the US (2.3% in 2017 and 2.5% in 2018), bolstered by the anticipated effects of President Trump's expansive fiscal policies. That said, uncertainties around our central forecast are unusually high given the high level of uncertainty surrounding the Trump administration. Encouragingly, there are increasing signs that the tighter labour market is leading to a pick‐up in wage inflation in the US, which will support consumers. Given these reflationary trends, we expect two increases in the Federal funds rate this year and US bond yields are likely to continue to rise. The widening of interest rate differentials between the US and the Eurozone will drive the euro down to parity with the US dollar by end‐2017 for the first time since 2002. We have revised our Brexit assumptions this month. We now assume that the two‐year period of exit negotiations is followed by a transitional arrangement lasting 2–3 years. This would provide breathing space to negotiate a free trade agreement with the EU. Emerging market growth on the whole will improve in 2017 but performance will differ across countries: Russia and Brazil will exit recession, but countries with weak balance of payments positions, high dollar debt and exposure to possible US protectionist actions will be at risk. In China, policymakers are moving to greater emphasis on reducing financial risks and less focus on the 6.5% GDP growth target for 2017. Continued action is also likely to dampen further depreciation of the CNY.

The Effects of Higher Oil Prices on the Level of Consumer Prices in Jamaica: An Estimation of the Pass-Through Effect for the Period 2001 to 2016

Oil prices on the world market over the last four decades have been viewed with serious macroeconomic concerns in oil-importing countries. In Jamaica, questions have been raised about the extent to which higher oil prices has pushed up the rate of inflation. Over the review period (January 2001 to April 2016), oil price (Petrojam billing price) to the pumps increased by approximately 325 per cent, while inflation rose by 309 per cent, with multiple peaks and troughs within. These increases, together with a high volatility in oil price, have serious implications for macroeconomic policy objectives given Jamaica’s high oil intensity ratio. This paper seeks to assess the inflationary effect of higher oil prices using the pass-through mechanism for the period 2001 to 2016, using monthly data.Results derived from this study show that a one-time 10 percentage points’ increase in oil price, denominated in the domestic currency, would push inflation up by 0.021, 0.020 and 0.014 percentage points during the first three months, respectively, after the initial change in oil price. Using oil prices to the local gas stations, an increase in the price of unleaded gasoline 87, unleaded gasoline 90 and diesel by 10 percentage points show that inflation increased in the following month by 0.02 percentage points, increases similar to that related to higher world prices.

How do oil supply and demand shocks affect Asian stock markets?

This paper examines how oil market shocks affect Asian stock prices using the structural vector autoregression (VAR) approach. Global oil supply and demand shocks are disentangled using sign restrictions and elasticity bounds. Oil price increases are bad news only if the source is from oil-market-specific demand shifts. Northeast Asian stock markets are more resilient as investors’ expectation of continued economic growth outweighs the adverse effect of higher oil prices. Increased global economic activity also stimulates stock prices. Global oil shocks are more important in explaining variability in Asian stock returns compared with the United States, suggesting different dynamics in Asia.

The Effects of Higher Oil Prices on the Level of Consumer Prices in Jamaica: An Estimation of the Magnitude of the Pass-Through Effect for the Period 2001 to 2010

Higher oil prices on the world market over the last five years have been viewed with serious macroeconomic concerns in oil-importing countries. In Jamaica, questions have been raised about the extent to which higher oil prices has pushed up the recent high rate of inflation. Over the last five years (2006-2010), oil price increased by approximately 23.0 per cent, while inflation rose by 64.8 per cent. These increases, together with a high volatility in oil price, have serious implications for macroeconomic policy objectives given Jamaica’s high oil intensity ratio. This paper seeks to assess the inflationary effect of higher oil prices using the pass-through mechanism for the period 2001 to 2010, using monthly data.Studies have shown a decline in the magnitude of the pass-through effect of oil prices on inflation for developed countries and for a number of developing countries over the last three decades. Results derived from this study show that a one time 10 percentage points increase in oil price would push inflation up by approximately 0.017, 0.012 and 0.024 percentage points during the first three months, respectively, after the initial change in oil price.

Oil demand shocks reconsidered: A cointegrated vector autoregression

We reconsider the conclusions about the importance of oil demand shocks and the unimportance of supply shocks reported by Kilian (2009). We investigate whether the proxy for worldwide real economic activity, dry bulk maritime freight costs, represents anything more than transportation costs by analyzing the relation between these costs and oil prices. The meaning of this variable is critical because transportation costs appear on both sides of the equations estimated by Kilian, directly as dry bulk maritime freight costs and as part of the measure for oil prices. We also investigate the effects of representing oil supply with an aggregate of OPEC and non-OPEC production because they likely use different criteria to chose output. Finally we investigate Kilian's use of the first difference of supply while the other variables in his model are represented as levels. The results suggest that OPEC and nonOPEC nations use different criteria to set output and that reductions (increases) in OPEC production raise (lower) oil prices. The elements of the cointegrating relations, their loadings, and impulse response functions suggest that the positive relation between dry bulk maritime freight costs and oil prices simply represents the effect of higher oil prices on transportation costs. Sensitivity analyses suggest that these differences are caused by including transportation costs in the measure of oil prices, aggregating OPEC and non-OPEC productions, and using a very long lag length to estimate the VAR. Together, these results suggest that conclusions about the importance of demand shocks and the unimportance of supply shocks are not robust to alternative specifications that are consistent with many empirical findings about the world oil market.

Asymmetric Effects of Oil Price Shocks on Economic Growth of Oil-Exporting Countries

Oil price shocks affect macroeconomic performance in both oil-importing and oil-exporting countries. The recent research on the oil-macroeconomy relationship in the oil-importing countries shows that oil price shocks have asymmetric effects on their economic growth; the adverse effects of higher oil prices are larger than the stimulating effects of lower prices. The effects of oil price shocks on economic performance and their transmission mechanism in oil-exporting countries are different than those in oil-importing countries. In this study, we examine the oil-macroeconomy nexus in the context of oil-exporting developing countries. We set up a VAR model with a GARCH-type oil price shocks to estimate and test the asymmetric effects of oil shocks in six major oil exporting members of OPEC for the period 1970-2009. The model includes oil price shocks and economic growth as two major variables of interest as well as the intermediate variables such as investment, exchange rate, and inflation rate. We find that in oil exporting developing countries, lower oil prices would lead to major revenue cuts and stagnation in the economy. However, higher oil prices and accompanying higher revenues do not translate to a sustained economic growth.

Asymmetric Effects of Oil Price Shocks on Economic Growth of Oil-Exporting Countries

Oil price shocks affect macroeconomic performance in both oil-importing and oil-exporting countries. The recent research on the oil-macroeconomy relationship in the oil-importing countries shows that oil price shocks have asymmetric effects on their economic growth; the adverse effects of higher oil prices are larger than the stimulating effects of lower prices. The effects of oil price shocks on economic performance and their transmission mechanism in oil-exporting countries are different than those in oil-importing countries. In this study, we examine the oil-macroeconomy nexus in the context of oil-exporting developing countries. We set up a VAR model with a GARCH-type oil price shocks to estimate and test the asymmetric effects of oil shocks in six major oil exporting members of OPEC for the period 1970-2009. The model includes oil price shocks and economic growth as two major variables of interest as well as the intermediate variables such as investment, exchange rate, and inflation rate. We find that in oil exporting developing countries, lower oil prices would lead to major revenue cuts and stagnation in the economy. However, higher oil prices and accompanying higher revenues do not translate to a sustained economic growth.

Oil Prices and Their Effect on Potential Output

Oil prices have fluctuated considerably in the last few years, with major effects on the economy. This paper describes some of the mechanisms by which these fluctuations produce changes in the long-run growth of the economy. In particular, it analyses the effect on productivity, capital stock and structural unemployment. The analysis suggests that a (permanent) increase in oil prices can significantly reduce potential output. From an economic policy point of view, this effect may be more marked when competition in the product markets is low or when wage indexation is high; thus, reforms aiming to increase competition and improve wage-setting mechanisms help to reduce the negative effects of higher oil prices on long-run economic growth.

Oil prices and their effect on potential output

This article describes some of the mechanisms by which oil price fluctuations produce changes in the long-run growth of the economy. The analysis suggests that a (permanent) increase in oil prices can significantly reduce potential output. From an economic policy point of view, this effect may be more marked when competition in the product markets is low or when wage indexation is high; thus, reforms aiming to increase competition and improve wage-setting mechanisms help to reduce the negative effects of higher oil prices on long-run economic growth.

The Macroeconomic Effects of Higher Oil Prices

The Macroeconomic Effects of Higher Oil Prices

The Macroeconomic Effects of Higher Oil Prices

The paper uses MULTIMOD to analyse the macroeconomic effects of oil price shocks, distinguishing between temporary, more persistent, and permanent shocks. It provides perspectives on several findings in the literature and the key role of monetary policy in influencing macroeconomic outcomes. Specific attention is paid to the channels through which oil price increases can pass through into core inflation, the implications of delayed policy responses, and the relative merits of leaning in different directions when the correct policy response is uncertain.

The Macroeconomic Effects of Higher Oil Prices

The Macroeconomic Effects of Higher Oil Prices

The Macroeconomic Effects of Higher Oil Prices

The paper uses MULTIMOD to analyze the macroeconomic effects of oil price shocks, distinguishing between temporary, more persistent, and permanent shocks. It provides perspectives on several findings in the literature and the key role of monetary policy in influencing macroeconomic outcomes. Specific attention is paid to the channels through which oil price increases can pass through into core inflation, a possible explanation of the asymmetric relationship between oil prices and economic activity, the role of monetary policy credibility, the implications of delayed policy responses, and the relative merits of leaning in different directions when the correct policy response is uncertain.

Can OPEC cause inflation and recession?

This paper addresses an issue that has been the subject of debate in the media and in academic circles. The issue concerns the effect of higher oil prices initiated by OPEC on economic activity in OECD countries. Results of cointegration tests indicate that there is no long-run relationship between oil prices and macroeconomic variables in OECD countries. However, causality testing indicates the existence of unidirectional causality from oil prices to domestic prices and output.