Contagious Energy Prices

The World Economy: We develop an empirical model of the determinants of end-use energy prices in 28 Organisation for Economic Co-operation and Development countries. For this, we construct a unique panel data-set and formulate a spatial panel econometric model with fixed country effects for the period of 1980–2009. A special feature of the proposed empirical model is that cross-country interdependence in energy prices surfaces through two channels, a metric of similarity towards energy policy and a metric of trade in energy goods. We estimate the parameters of that model and conduct several comparative static experiments. We find that higher income per capita and lower efficiency in energy distribution tend to raise energy prices whereas higher net imports of energy and more abundant energy resource endowments reduce them. We also find that bilateral trade in energy goods is an important channel of transmission of shocks in energy prices across countries. The estimation results suggest that countries that use the same types of resources to generate energy are likely to transmit energy price shocks to each other through competition effects.