8. Oil prices

In this experiment we increase the market prices of oil permanently. The experiment has a lot of similarity with the previous experiment on foreign prices. Change in world oil prices affects all countries in the world and hence foreign markets and foreign prices will be affected. However, the experiment here does not take the international spillover into account.

 

The experiment presents the effect of a permanent 10 percent increase in world market oil prices.(See experiment)

 

Table 8. The effect of a permanent increase in world market oil prices

    1. yr 2. yr 3. yr 4. yr 5. yr 10. yr 15. yr 20. yr 25. yr 30. yr
    Million 2010-Dkr.
Priv. consumption fCp -1939 -4184 -5578 -6604 -7407 -9971 -11255 -11860 -12221 -12785
Pub. consumption fCo 65 150 218 272 311 382 349 293 257 259
Investment fI -1576 -3524 -4335 -4806 -5185 -5423 -4151 -2969 -2462 -2672
Export fE -1223 -1934 -2297 -2440 -2419 -356 3339 6405 7720 7433
Import fM -1701 -3651 -4388 -4758 -4971 -5329 -4607 -3748 -3331 -3567
GDP fY -3055 -5994 -7697 -8854 -9659 -9785 -6780 -3991 -2901 -3624
    1000 Persons
Employment Q -2.17 -4.53 -6.19 -7.39 -8.18 -7.35 -2.80 1.10 2.77 2.45
Unemployment Ul 1.23 2.39 3.17 3.74 4.13 3.71 1.43 -0.53 -1.39 -1.24
    Percent of GDP
Pub. budget balance Tfn_o/Y -0.03 -0.10 -0.15 -0.19 -0.21 -0.22 -0.16 -0.11 -0.09 -0.10
Priv. saving surplus Tfn_hc/Y -0.05 0.05 0.11 0.14 0.16 0.16 0.11 0.07 0.05 0.05
Balance of payments Enl/Y -0.09 -0.05 -0.04 -0.04 -0.05 -0.06 -0.05 -0.03 -0.03 -0.04
Foreign receivables Wnnb_e/Y 0.00 -0.10 -0.19 -0.28 -0.38 -0.82 -1.18 -1.42 -1.61 -1.82
Bond debt Wbd_os_z/Y 0.06 0.19 0.35 0.54 0.75 1.72 2.28 2.44 2.40 2.35
    Percent
Capital intensity fKn/fX 0.10 0.17 0.19 0.19 0.17 -0.07 -0.30 -0.41 -0.41 -0.36
Labour intensity hq/fX 0.05 0.08 0.09 0.09 0.09 0.07 0.07 0.08 0.09 0.09
User cost uim 0.07 0.08 0.08 0.06 0.04 -0.11 -0.22 -0.25 -0.23 -0.18
Wage lna 0.01 -0.03 -0.10 -0.18 -0.27 -0.73 -1.01 -1.05 -0.95 -0.81
Consumption price pcp 0.19 0.23 0.22 0.21 0.19 0.05 -0.08 -0.14 -0.13 -0.09
Terms of trade bpe -0.28 -0.32 -0.33 -0.34 -0.36 -0.46 -0.54 -0.56 -0.55 -0.52
    Percentage-point
Consumption ratio bcp 0.12 0.05 0.00 -0.04 -0.05 -0.07 -0.06 -0.06 -0.07 -0.07
Wage share byw 0.07 0.07 0.05 0.02 -0.01 -0.13 -0.17 -0.14 -0.10 -0.06

(See details)

 

The increase in oil prices raises expenditure on energy imports, and the balance of payments deteriorates immediately. Nevertheless, energy exports also increase and offset most of the negative effect on the balance of payments. The public budget improves in the short run because higher oil prices mean higher taxable profits in the hydrocarbon-extracting industry.

 

The increase in energy price affects the general price level, and the accompanying fall in real income reduces consumption and economic activity. In the medium run, the higher unemployment reduces wages and increases competitiveness, so the period of contraction is followed by a period of expansion in employment and production.

 

The long-term effect on employment is zero like in the previous demand shock experiments. Thus, the increase in oil prices also represents a shock to the supply side of the international economy but it does not constitute a permanent supply shock to the employment. The long-term effect on GDP is negative partly due to the substitution effect of the permanent fall in the relative price of labor, and partly due to the permanent fall in private consumption, which triggers a fall in the content of indirect taxes in GDP. In general, the higher oil price works as a negative demand shock in the short run, and in the long run it works as a supply shock as relative factor prices change in the long run. The higher public revenues can be used to increase e.g. private consumption. Higher consumption would reduce the negative impact on wages and the positive impact on exports.

 

 

Figure 8. The effect of a permanent increase in world market oil prices

 

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fig_8_3_zoom38fig_8_4_zoom38

 

 

fig_8_5_zoom38fig_8_6_zoom38

 

 

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