The recent dramatic decline in the price of oil runs counter to the argument that oil prices should be high because of the high costs. This column presents new evidence on this relationship. Using a representative global dataset, the authors find that upstream costs follow oil prices with a time lag. In particular, a sustained 10% increase in the price of oil leads to an increase in upstream activity of about 4%, and in this way triggers a sustained 3% increase in global upstream costs after a lag of one to two years.
Alexander Naumov, Gerhard Toews, 22 February 2016
Wouter den Haan, Martin Ellison, Ethan Ilzetzki, Michael McMahon, Ricardo Reis, 28 January 2016
The beginning of 2016 has seen dramatic developments in key markets, including falls in share prices, low oil prices, and a slowdown in some emerging market economies. This column summarises the views expressed on these issues by leading experts in the monthly Centre for Macroeconomics survey. While all recognise the considerable uncertainty in the world economy, fewer than a third fear that these events will have a significant negative impact on the UK’s economic recovery. The prevailing argument is that any negative effects of lower foreign demand and market instability will be compensated by the benefits of lower oil prices.
Rabah Arezki, Maurice Obstfeld, 03 December 2015
Oil prices have dropped by over 60% since June 2014, and natural gas and coal have also seen price declines that look to be similarly long-lived. This column argues that action to restore appropriate price incentives, notably through corrective carbon pricing, is urgently needed to lower the risk of irreversible and potentially devastating effects of climate change. The hope is that the success of COP21 opens the door to future international agreement on carbon prices.
Nathan Sussman, Osnat Zohar, 16 September 2015
The 2014 decline in oil prices lowered short-run inflation. Before the Global Crisis, the medium-term correlation between oil prices and inflation was weak, but it has become much stronger since the onset of the Crisis. This column suggests that following the onset of the Crisis, inflation expectations reacted quite strongly to global demand conditions and oil supply shocks. The public’s belief in the ability of monetary authorities to stabilise inflation at the medium-term horizon has deteriorated.
Stefano Neri, Stefano Siviero, 15 August 2015
EZ inflation has been falling steadily since early 2013, turning negative in late 2014. This column surveys a host of recent research from Banca d’Italia that examined the drivers of this fall, its macroeconomic effects, and ECB responses. Aggregate demand and oil prices played key roles in the drop, which has consistently ‘surprised’ market-based expectations. Towards the end of 2014 the risk of the ECB de-anchoring inflation expectations from the definition of price stability became material.
Sascha Bützer, Maurizio Habib, Livio Stracca, 07 March 2015
The large dip in oil prices reverberated across asset markets, contributing to the depreciation of the Russian rouble. This column argues that the recent fall of the rouble may be more an exception than the norm. Oil shocks have only a limited impact on global exchange rate configurations, since oil exporters tend to lean against exchange rate pressures by running down or accumulating foreign exchange reserves.
Lutz Kilian, 14 January 2015
The recent expansion of US shale oil production has captured the imagination of policymakers and industry analysts. It has fuelled visions of the US becoming independent of oil imports, of cheap US gasoline, of a rebirth of US manufacturing, and of net oil exports improving the US current account. This column asks how plausible these visions are, and examines the evidence to date.
Rabah Arezki, Olivier Blanchard, 13 January 2015
Plunging oil prices affect everyone, albeit no two countries will experience it in the same way. In this column, the IMF’s Chief Economist Olivier Blanchard and Senior Economist Rabah Arezki examine the causes as well as the consequences for various groups of countries and for financial stability more broadly. The analysis has important implications for how policymakers should address the impact on their economies.
Christiane Baumeister, Lutz Kilian, 19 November 2014
Futures prices are a potentially valuable source of information about market expectations of asset prices. This column discusses a general approach to recovering this expectation when there is no agreement on the nature of the time-varying risk premium contained in futures prices. The authors illustrate this approach by tackling the long-standing problem of how to recover the market expectation of the price of crude oil.
Christiane Baumeister, Lutz Kilian, Xiaoqing Zhou, 24 September 2013
Recent work on forecasting oil prices raises the question of whether oil industry analysts know something about forecasting the price of oil that academic economists have missed. This column presents evidence that they do, but economists know how to improve further on these practitioners’ insights.
Lutz Kilian, 29 June 2012
It has long been argued that changes in the price of oil can help forecast US real GDP growth. This column addresses the common concern among many policymakers that the feedback from oil prices to the economy may become stronger once the price of oil reaches a certain level.
Michael Spence, 08 April 2011
Michael Spence of Stanford University talks to Viv Davies about growth prospects in the US and developing countries. He describes the current divergence between growth and employment in the US economy. They also discuss global imbalances, fiscal coordination in Europe, the global investment rate and the threat of rising oil prices to global growth. The interview was recorded in Washington DC in March 2011 at the IMF conference, ‘Macro and Growth Policies in the Wake of the Crisis’. [Also read the transcript.]
Francesco Lippi, 11 June 2008
High oil prices are back – more than $125 per barrel. Such prices are associated with the macroeconomic pains of the 1970s, but this column argues that the recent surge may actually be good news for developed economies’ industries. The logic lies in the difference between demand shocks and supply shocks.
Sergei Guriev, Anton Kolotilin, Konstantin Sonin, 12 April 2008
The rising price of oil has been accompanied by nationalisations of oil assets, and the relationship is no mere coincidence. Recent research shows that higher oil prices trigger expropriations, particularly in countries with weak political institutions.
Daniel Gros, 21 December 2007
Coal’s supply elasticity is much higher than that of oil, so rising demand encourages substitution to dirty coal from cleaner oil – and switching is easy ex ante but hard ex post. In the next 10 years, China will install more power-generation capacity than Europe’s current stock. If it is all coal-burning, emissions will be difficult to reduce for decades. High oil prices are not part of the solution; they are part of the problem.
Art Durnev, Sergei Guriev, 21 November 2007
The consensus story: Resource abundance boosts GDP in the short-run but hinders or reverses the development of growth-enhancing institutions and thus long-run growth. New evidence suggests that this works by worsening corporate transparency, capital allocation and growth.