XXIV Meeting of the Latin American Network of Central Banks and XXIV Meeting of the Latin American Network of Central Banks and Finance MinistriesFinance Ministries

The Effect of Oil PricesThe Effect of Oil Prices

The Case of the ImportersThe Case of the Importers

Fidel JaramilloFidel Jaramillo

Inter-American Development BankInter-American Development BankRegional Economic AdvisorRegional Economic Advisor

Andean Region and the CaribbeanAndean Region and the Caribbean

Washington D.C, October 19-20, 2006Washington D.C, October 19-20, 2006

Oil Shocks: a long-run perspective (1900-2006)Oil Shocks: a long-run perspective (1900-2006)

0

10

20

30

40

50

60

70

80

90

100

1900

1905

1910

1915

1920

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Nominal (US$/b) Real (at 2005 prices)

0

10

20

30

40

50

60

70

80

90

100

1900

1905

1910

1915

1920

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Nominal (US$/b) Real (at 2005 prices)

US-Dominated Market (-’34)

7 Sisters Agreement (’34-’73))

Arab OilEmbargo (‘74)

Iranian Crisis (’79-’81)

Kuwait Invasion (’90)

Upswing (2000-)

Source: Bloomberg, IADB

Oil Price Oil Price (Annual Average, US$/barrel)(Annual Average, US$/barrel)

Current trend has been persistent…Current trend has been persistent…

0

10

20

30

40

50

60

70

80

90

Nominal price (US$/b)

Trend (52 week moving average)

Iraq's Invasion of Kuwait

Iranian Revolution

Yom-Kippur War and OPEC oil embargo 10

11

3

Nº months to peakEpisode* Oil Price Variation

(month zero to peak)

317%

152%

103%

Starting date

End date

Apr-73

Jan-79

Jan-75

Jun-80

Aug-90 Dec-90

22

18

5

Current Shock 29115% Dec-03 n.a. 29

Source: Bloomberg, Latin Macro Watch, 2006, IADB.

Oil PricePrevious Shock*

(month of shock = 0)

mon

th z

ero

= 10

0

90100110120130140150160170180190

0 2 4 6 8 10 12 14 16 18 20 22 24

Current ShockOil Price

90

110

130

150

170

190

210

Dec

-03

Mar

-04

Jun-

04

Sep

-04

Dec

-04

Mar

-05

Jun-

05

Sep

-05

Dec

-05

(month of shock = Dec-03)

Dec

-03

= 10

0

(month of shock = 0)

Nº of months after the shock

98.5

99

99.5

100

100.5

0 2 4 6 8 10 12 14 16 18 20 22 24

World Oil Consumption

mon

th z

ero

= 10

0

World Oil Consumption

100

101

102

103

104

105

Dec

-03

Mar

-04

Jun-

04

Sep

-04

Dec

-04

Mar

-05

Jun-

05

Sep

-05

Dec

-05

(month of shock = Dec-03)

Dec

-03

= 10

0

……explained by a shock of different natureexplained by a shock of different nature

Source: Latin Macro Watch, 2006

Price (Poil)

Quantity (qoil)

p0oil

Supply

q1oil

P1oil

Oil Market Commodities Market

Demand0 (Yw0)

q0oil

Price (Pc)

Quantity (qc)

p1c

Supply

p0c

Demand (Yw0)

q0c q1

c

Demand Shock

Demand (Yw1)

Demand Shock

Demand1 (Yw1)

Yw = World Output

Oil Demand Shocks: A Simple Graphical AnalysisOil Demand Shocks: A Simple Graphical Analysis

Source: Latin Macro Watch, 2006

Growth and external sector have been strong…Growth and external sector have been strong…

(in % of GDP, net oil importers in each episode; month of shock = 0)

Nº of months after the shock

Current Account

-4.0%-3.8%-3.6%-3.4%-3.2%-3.0%-2.8%-2.6%-2.4%-2.2%-2.0%

% o

f GD

P

Current Account(in % of GDP, net oil importers; month of shock = Dec-03)

-0.60%-0.40%-0.20%0.00%0.20%0.40%0.60%0.80%1.00%1.20%1.40%

Dec

-03

Feb-

04

Apr

-04

Jun-

04

Aug

-04

Oct

-04

Dec

-04

Feb-

05

Apr

-05

Jun-

05

Aug

-05

Oct

-05

Dec

-05

% o

f GD

P

0 2 4 6 8 10 12 14 16 18 20 22 24

93

94

95

96

97

98

99

100

101

102

mon

th z

ero

= 10

0 Rest of G-7**

US

Economic Activity(month of shock=0)

0 2 4 6 8 10 12 14 16 18 20 22 24

Economic Activity(month of shock = Dec-03)

99

100

101

102

103

104

105

106

107

108

Dec

-03

Feb-

04

Apr

-04

Jun-

04

Aug

-04

Oct

-04

Dec

-04

Feb-

05

Apr

-05

Jun-

05

Aug

-05

Oct

-05

Dec

-05

US

Dec

-03

= 10

0

Rest of G-7**

**includes Canada, France, Germany, Italy, Japan & UK

Previous (supply) Shock* Current (demand) Shock

*Yom-Kippur War and OPEC oil embargo (Oct-73), Iranian Revolution (Jan-79) and Iraq's Invasion of Kuwait (Aug-90)Source: Latin Macro Watch, 2006

Variation

……with oil and commodity prices moving togetherwith oil and commodity prices moving together

PreviousPrevious Shock* Shock* (month of shock = 0)

*Yom-Kippur War and OPEC oil embargo (Oct-73), Iranian Revolution (Jan-79) and Iraq's Invasion of Kuwait (Aug-90)

Current ShockCurrent Shock (month of shock = Dec-03)

90

110

130

150

170

190

210

Dec

-03

Feb-

04

Apr

-04

Jun-

04

Aug

-04

Oct

-04

Dec

-04

Feb-

05

Apr

-05

Jun-

05

Aug

-05

Oct

-05

Dec

-05

Feb-

06

Metals

BeveragesOil

Agricultural Raw

MaterialsFood

Nº of months after the shock

mon

th z

ero

= 10

0

Oil

Metals

Agricultural Raw Materials

Food

Beverages60

70

80

90

100

110

120

130

140

150

160

170

180

190

0 1 2 3 4 5 6 7 8 9 10111213141516171819202122 2324

Oil

Foods -13.2%

Metals -15.7%

+70.5%

Agricultural Raw Materials-25.3%

Beverages -31.2%

Variation

Foods

MetalsOil

+2.5%

+72.4%

+115.2%

Agricultural Raw Materials+0.5%

Beverages +22.0%

(Oil and commodity prices (Oil and commodity prices deflated by US CPIdeflated by US CPI))

Source: Latin Macro Watch, 2006

Oil demand has been increasing, in particular Oil demand has been increasing, in particular from non OECD Asiafrom non OECD Asia

Incremental oil consumption by region (in thousand bar rels per day)

0

500

1000

1500

2000

2500

3000

2001 2002 2003 2004 2005

OECD FORMER USSR ASIA (non-OECD) OTHER DEVELOPING

Source: IADB, 2006

……while oil supply from OECD has declinedwhile oil supply from OECD has declined

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

2001 2002 2003 2004 2005

OECD FORMER USSR OPEC OTHER DEVELOPING

Source: IADB, 2006

Incremental Oil Production by region Incremental Oil Production by region (Thousand of barrels per day)(Thousand of barrels per day)

Impact on Latin America and the Caribbean: Impact on Latin America and the Caribbean: The case of the net importersThe case of the net importers

-30%

-20%

-10%

0%

10%

20%

30%

Ven

ezue

laT&

TE

cuad

orB

oliv

iaC

olom

bia

Arg

entin

naM

exic

oP

anam

aB

arba

dos

Bra

zil

Per

uG

uate

mal

aC

hile

ElS

alva

dor

Cos

ta R

ica

Sur

inam

eU

rugu

ayP

arag

uay

Nic

arag

uaJa

mai

caG

uyan

a

Net Oil Exports as a Share of GDPNet Oil Exports as a Share of GDP (2004)(2004)

Net importers South America• Chile

• Paraguay• Uruguay

Central America Costa Rica Nicaragua El Salvador

Caribbean Barbados Jamaica Guyana Suriname

Source: UN Comtrade, World Development Indicators. IADB

Most countries have become more energy-Most countries have become more energy-efficient…efficient…

Barrels Consumed as % of GDP 1970-2004

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

CARIBBEAN (imp.) CENTRAL AMERICA (imp.) SOUTH AMERICA (imp.)

Source:OLADE 2006

……but per capita consumption has been increasingbut per capita consumption has been increasing

Average oil consumption (barrels per capita per year)

00.5

11.5

22.5

33.5

44.5

5

Caribbean (imp.)Central America (imp.)South America (imp.)

Per capita oil consumption(1990 = 100)

0

20

40

60

80

100

120

140

160

180

200

Caribbean (imp.)Central America (imp.)South America (imp.)

Source:OLADE 2006

Transport sector is the major oil consumer…Transport sector is the major oil consumer…

Oil consumption by sector(in % of total)

-net oil importers-

0%10%20%30%40%50%60%70%80%90%

100%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Transportation Industry Residential Commercial

Source:OLADE 2006

……and has increased its demand significantlyand has increased its demand significantly

Oil consumption of transportation sector(1970 = 100)

0

50

100

150

200

250

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

CARIBBEAN CENTRAL AMERICA SOUTH AMERICASource:OLADE 2006

Oil bill is taking toll on imports…Oil bill is taking toll on imports…

0%

5%

10%

15%

20%

25%

30%

Paragu

ayChil

e

Urugua

y

Costa R

ica

El Salv

ador

Guatem

ala

Nicarag

ua

Barbad

os

Surina

me

Jamaic

a

Guyan

a

Fuel imports as a % of merchandise imports

2002 2004

Impact• External

Accounts• Growth• Fiscal balance• Inflation

Source: UN Comtrade, World Development Indicators

……but external accounts have not deterioratedbut external accounts have not deteriorated

01020304050 Oil Price

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

South America Central America Caribbean

Source:Word Development Indicators, bloomberg, IMF

Current Account (in % of GDP)

(due to positive global demand shock…)(due to positive global demand shock…)

……although partial effect may be sizeablealthough partial effect may be sizeable

Current account (with and without oil price effect)-as % of GDP-

-17%

-12%

-7%

-2%

3%

Current account 2004 Current account 2004 (at 2002 oil prices)

Source:Word Development Indicators, IADB

Oil price impact on real exchange rate Oil price impact on real exchange rate (assuming sudden stop of external capital and all other variables constant)(assuming sudden stop of external capital and all other variables constant)

0

10

20

30

40

50

GUY HND JA URU PAR CHI NIC BAH BE SLV GTM PAN CRI DOM SU BA

Implied real exchange rate depreciation

Change in REER required 2002-2005 (%) Change in REER required 2004-2005 (%)GUY HND JA URU PAR CHI NIC BAH BE SLV GTM PAN CRI DOM SU BA

Net Oil Imports (US$ millions, 2002) 126 604 598 281 278 2323 224 173 59 514 556 459 432 419 13 17Oil Price Increase 2002-2005 (%)* 95.6%Oil Price Increase 2004-2005 (%)* 40.5%

Oil Imports Increase 2002-2005 As a share of GDP 2005 15.3 7.2 5.9 1.6 3.3 1.9 4.3 2.8 5.1 3.0 1.9 3.0 2.1 1.8 0.9 0.6 As a share of Imports 2002 16.9 16.9 12.0 10.9 10.7 10.6 9.9 9.4 9.0 8.3 7.8 5.7 5.3 3.9 2.4 1.2Oil Imports Increase 2004-2005 As a share of GDP 2005 6.5 3.1 2.5 0.7 1.4 0.8 1.8 1.2 2.2 1.3 0.8 1.3 0.9 0.8 0.4 0.2 As a share of Imports 2002 7.2 7.1 5.1 4.6 4.5 4.5 4.2 4.0 3.8 3.5 3.3 2.4 2.3 1.7 1.0 0.5

Change in REER required 2002-2005 (%) 42.3 42.1 29.9 27.1 26.7 26.6 24.7 23.5 22.4 20.8 19.4 14.3 13.4 9.9 6.0 2.9Change in REER required 2004-2005 (%) 17.9 17.8 12.7 11.5 11.3 11.3 10.4 9.9 9.5 8.8 8.2 6.1 5.7 4.2 2.6 1.2

Source: IADB 2006

So far, current oil price increases have not So far, current oil price increases have not harmed growth prospects...harmed growth prospects...

(also due to positive global demand shock…)(also due to positive global demand shock…)

0

10

20

30

40

50Oil Price

-10%-8%-6%-4%-2%0%2%4%6%8%

10%12%

South America Central America Caribbean

Real GDP Growth

Source:Word Development Indicators, Bloomberg, IADB

……but vulnerabilities remain but vulnerabilities remain (impact of a 100% increase in oil prices)

Latin America and the Caribbean: Net Oil Importers by Sub-Region*

South AmericaCentral AmericaCaribbean Countries-1.8%

-1.6%

-1.4%

-1.2%

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

* Weighted at PPP adjusted GDP.

*Guyana and Jamaica are own calculations using World Bank 2006 methodology

Impact of Higher Prices on Economic Growth

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

Guy

ana

Jam

aica

Chi

le

Uru

guay

Nic

arag

ua

Par

agua

y

El S

alva

dor

Cos

ta R

ica

Sur

inam

e

Bar

bado

s

Gua

tem

ala

Source: Assesing the impact of Higher Oil Prices in Latin America. World Bank 2006. Latin Macro Watch, 2006

Pass-through to inflation is affecting the region…Pass-through to inflation is affecting the region…

0

2

4

6

8

10

12

2002 2003 2004 2005 2006

South A Central A. Caribean

Source:World Development Indicators

2003 2004 2005 2006Barbados 1.6 1.4 6 7.9Guyana 6 4.7 6.9 8.3Jamaica 10.5 13.4 15.3 8.4Suriname 23 9.1 9.9 8.1Caribbean* 6.0 6.5 9.4 8.2Costa Rica 9 12 14 12.4El Salvador 2 4 5 4.3Guatemala 5 7 8 7Nicaragua 5 8 9 9Central A. 5.3 7.8 9.0 8.2Paraguay 14 4 7 7.7Uruguay 19 9 5 6.9Chile 3 1 3 3.7South A 12 4.7 5 6.1* Caribbean Average excludes Suriname

Average Inflation per Region

……and could have an effect on public financesand could have an effect on public finances

Total Debt (% GDP)

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

2000 2004 2005

Source:IMF, EIU, WEO

-16.00%

-14.00%

-12.00%

-10.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

2003 2004 2005

Global Central Government Balance (as a % of GDP)

What can we expect…?What can we expect…?

3,400

3,500

3,600

3,700

3,800

3,900

4,000

4,100

4,200

4,300

0

10

20

30

40

50

60

70

80

90

1/14

/200

0

7/14

/200

0

1/14

/200

1

7/14

/200

1

1/14

/200

2

7/14

/200

2

1/14

/200

3

7/14

/200

3

1/14

/200

4

7/14

/200

4

1/14

/200

5

7/14

/200

5

1/14

/200

6

7/14

/200

6

1/14

/200

7

7/14

/200

7

1/14

/200

8

7/14

/200

8

FORECAST 15/9/2006

WTI spot price per barrel ($/b) end of period weekly Historical: 14/1/2000 - 22/9/2006Forecast: 29/9/2006 - 26/12/200652 weeks moving average and possible lower boundary

Oil Price Scenario 2000-08Monthly Oil Stocks for OECD Countries

January 2001- May 2006 (Mbbl)

Source:Bloomberg, Energy Information Administration, IADB

Is there a risk of another supply shock…?Is there a risk of another supply shock…?

Strait of HormuzStrait of Hormuz

Assumptions:*• Closing of the Strait of Hormuz in the event of a conflict with Iran• A reduction of 20% in oil supplies• Demand Elasticity of 0.2

• 100% rise in oil prices or US$ 130 per barrel* Source: Deutsche Bank, Latin Macro Watch

Thanks

Fidel JaramilloIADB, Oct. 19th, 2006