Energy and the Macroeconomy: the role of natural gas and the U.S. - PowerPoint PPT Presentation

Energy and the Macroeconomy: the role of natural gas and the U.S. energy boom Presentation by Prakash Loungani Advisor, Research Department, IMF Head of Commodities Team The views expressed are those of the presenter and should not be attributed to the IMF.

Outline Takeaways Oil & the Macroeconomy: No longer about just oil : A. A. New Developments since Diversification in sources Blanchard-Gali (natural gas; US energy boom) Depend, but Diversify B. Measuring Diversification B. Don’t Get Carried Away C. Impact of U.S. Energy C. by the Shale Gale Boom

A. Oil & the Macroeconomy: Some New Developments • Diversification from increasing role of natural gas • Boom in ‘unconventional energy’

Oil & the Macroeconomy: A Slippery Relationship “The macroeconomic impacts of oil shocks are ignored [in the book]; this neglect is sensible given the wide varieties of prevailing views and the uncertainties about which results, if any, are valid.” -- Richard L. Gordon (in a book review in The Energy Journal)

Two dominant views Exogenous oil price shocks have played a key role in � nearly every post-WWII U.S. recession and remain an important force even today The importance of oil price shocks in causing the � 1970s stagflation has been overstated. Oil price increases today are driven by demand � increases in emerging markets and are different from the oil shocks of the 1970s

A two-handed approach

Some new developments Adding two elements to Blanchard-Gali view � More sources of energy � � Role of natural gas More sources of supply � � Unconventional energy boom Not discussed in this presentation but always lurking: � short-run effects—including through ‘uncertainty’ � channel—from large supply disruptions

U.S. Energy Boom

B. Measuring Diversification • Takeaway Message: “Depend, but Diversify” (meant to remind old-timers of “Trust, but Verify”) Based on Cohen, Joutz and Loungani, Energy Policy, 2011 (with some updates)

Calls for energy ‘independence’ See Loungani (2009), “The Elusive Quest for Energy Independence,” International Finance , for a review of these books

Indices of diversification in net imports 2 = � NPI i CSI ( ) *100 C i max{0, } NPI M X = − i ij ij

1.0 2.0 3.0 4.0 5.0 6.0 7.0 - Global Oil Diversification 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Oil Supply DI 2007 2008 2009 2010 2011 2012

11.0 13.0 15.0 17.0 Global Gas Diversification 5.0 7.0 9.0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Natural Gas Supply DI 2007 2008 2009 2010 2011 2012

Diversification index for oil 25.00 20.00 15.00 10.00 5.00 0.00 y n a n e a y d d a d n e y l k a l y e c i m e d d a a i a c n n s n e d r s a r r r n n k c i m g d p e c a e n t d a a l o a u n a p t i a a I a i a t u a r e g n a n s a l l l o l e i l m r S K r o b r a m u e u b n t J n a d l a w g l t t F a G P u r r T r i A l u u n C s S l g o r r S F e I e e p u e p e n H Z P e B z d e D A G i h t e R K e i R w t w t e i e k d h n N S N c a e U v t e i z o n C l U S

Diversification index for natural gas 25.00 20.00 15.00 10.00 5.00 0.00 y e d n n y a d d n e l k a c m l y n i i a s a d r c n a n s e i r m n n a r d c e e g p k t a n a d a u t a a a a p i n t I e u a o l a g s l e l l a i o r m a r m S b n n u e J a d g w t v l t F P G r r r i l l u A u n S g o r r o F e e S I e p l e n H e B z P d S D G e h i t e K i R t w t e i N n d S h e c U t e i z n C U

Diversification: the bottom-line - Natural Gas 1 to 6 7 to 13 14 to 19 Ranking Vulnerability Low Medium High Low France, US, UK Spain, Portugal 1 to 8 Austria, Medium Italy Germany, Sweden 9 to 18 Crude Oil Japan, Ireland Czech Republic, Switzerland, Finland, High Belgium, Poland 19 to 26 Hungary Greece, Slovak Republic Source: Cohen, Joutz and Loungani i, Energy Policy .

C. Impact of U.S. Energy Boom • Takeaway Message: “Don’t Get Carried Away by the Shale Gale” -- Loungani and Matsumoto (forthcoming), Decoupling of Oil and Natural Gas Prices: Long Separation or Permanent Split? -- Celasun, Oya, Gabriel di Bella, Tim Mahedy, and Chris Papageorgiou (2014), “The US Manufacturing Recovery: Uptick or Renaissance?”, IMF Working Paper 14/28. -- U.S. 2012 Article IV consultation (July 2013), http://www.imf.org/external/pubs/ft/scr/2013/cr13237.pdf

Co-movement of Oil & Gas Prices … (index; 2005 = 100, January 1993 to December 2005) 1a. United States: Gas, Oil 1b. Germany: Gas, Oil 160 160 Gas Gas Oil 140 Oil 140 120 120 100 100 80 80 60 60 40 40 20 20 0 0 93 94 95 96 97 98 99 00 01 02 03 04 05 93 94 95 96 97 98 99 00 01 02 03 04 05 1c. Gas: United States, Germany 1d. Oil: United States, Germany 160 160 United States United States Germany Germany 140 140 120 120 100 100 80 80 60 60 40 40 20 20 0 0 93 94 95 96 97 98 99 00 01 02 03 04 05 93 94 95 96 97 98 99 00 01 02 03 04 05 Source: Loungani and Matsumoto, 2014

… but a decoupling since 2005 (index; 2005 = 100, January 2006 to February 2013) 2a. United States: Gas, Oil 2b. Germany: Gas, Oil 300 300 Gas Gas Oil Oil 250 250 200 200 150 150 100 100 50 50 0 0 06 07 08 09 10 11 12 13 06 07 08 09 10 11 12 13 2c. Gas: United States, Germany 2d. Oil: United States, Germany 300 300 United States United States Germany Germany 250 250 200 200 150 150 100 100 50 50 0 0 06 07 08 09 10 11 12 13 06 07 08 09 10 11 12 13 Sources: U.S. Bureau of Labor Statistics; Federal Statistic Office (Germany).

The U.S. Manufacturing Rebound …

…is not due solely to lower U.S. natural gas prices Two other factors: � The US real effective exchange rate has depreciated over the last decade, in particular against emerging-market currencies. � Unit labor costs in the US have decreased relative to emerging markets.

�������������������������������������������������� Global Economic Model (GEM) simulations: increase in U.S. energy production over the next 12 years by 1.8% of GDP, cumulatively Impact on the United States (percent) Source: IMF staff calculations. 23 Medium-term impact refers to impact after 13 years.

������������������������������������������������ Global Economic Model (GEM) simulations: increase in U.S. energy production over the next 12 years by 1.8% of GDP, cumulatively Impact on the Rest-of-World GDP (percent) Source: IMF staff calculations. 24 Medium-term impact refers to impact after 13 years.

Thank you & shameless self-promotion � Visit our website: http://www.imf.org/external/np/res/commod/index.aspx Some of our products: � � Commodities Market Monthly http://www.imf.org/external/np/res/commod/pdf/monthly/060114.pdf � Commodities Price Outlook & Risks http://www.imf.org/external/np/res/commod/pdf/cpor/2014/cpor0514.pdf IMF Commodities Team: Prakash Loungani, Rabah Arezki, Akito Matsumoto, � Shane Streifel, Marina Rousset, Daniel Rivera Greenwood, Hites Ahir