Tuesday, December 23, 2014

Arezki and Blanchard: Seven Questions About The Recent Oil Price Slump

Rabah Arezki, who recently visited us, writes on IMFDirect together with IMF's chief economist Olivier Blanchard on the implications of declining oil price on the world economy.
Oil prices have plunged recently, affecting everyone: producers, exporters, governments, and consumers. Overall, we see this as a shot in the arm for the global economy. Bearing in mind that our simulations do not represent a forecast of the state of the global economy, we find a gain for world GDP between 0.3 and 0.7 percent in 2015, compared to a scenario without the drop in oil prices. There is however much more to this complex and evolving story. In this blog we examine the mechanics of the oil market now and in the future, the implications for various groups of countries as well as for financial stability, and how policymakers should address the impact on their economies.
Read on here [imf.org]

Friday, December 19, 2014

'Low oil price? increase carbon price!', Maria van der Hoeven (Exec-Dir. IEA) states

Maria van der Hoeven, executive-director of the International Energy Agency, writes in The Huffington Post and Energy Post that policy makers should take the opportunity to implement or sustain policies that encourage efficient use of fossil fuels and stimulate the case for renewables. This includes lowering subsidies in fossil fuel use, existing mostly among developing countries and increase the carbon price in developed countries, to offset the negative consequences of increased oil/gas use triggered by the low prices of today. 

Thursday, December 18, 2014

NYT: gas and middle-east peace

The New York Times reported [nytimes.com] on how the special structure put around the exploitation of the gas field in the Israeli part of the Mediterranean may help create economic linkages that ultimately could help in fostering peace with its neighbours.

Natural gas is both a geopolitical tool and a target in Israel, where a newfound bonanza of resources has the potential to improve ties with energy-hungry Egypt, Jordan and even the Palestinian Authority.
But the linchpin of this diplomatic push is not an Israeli official, a Middle Eastern king or an American ambassador. It is an oil company in Texas.

Friday, December 12, 2014

Big Oil and the value of their assets 2

In an update to a post [oxcarre.blogspot.com] of last summer, the UK Energy Secretary has backed [FT.com] the idea that oil companies' reserves may need to be revalued in light of the world's commitment to not exceed aparticular stock of carbon in the atmosphere. 

Tuesday, December 9, 2014

The Economist features low oil price, shale gas and the competition from the Middle East

This week's Economist opens with a leader on the dynamics surrounding the oil price, shale oil/gas production in the US and the conventional production in the Middle East. With more analysis further in (here and here).

Monday, December 8, 2014

Everybody loves SWF

FT's Gillian Tett comments [FT.com] on the sudden popularity of Sovereign Wealth Fund constructs, including among western countries. She notes in particular that the UK Treasurer Osborne announced to set up one in his autumn statement [FT.com]:
we’re announcing a new Sovereign Wealth Fund for the North of England so that the shale gas resources of the North are used to invest in the future of the North.
The revenues of shale gas are for now still largely illusionary. The question why the UK didn't set up a SWF for for their real revenues from the North sea was discussed in the Guardian [oxcarre.blogspot.com] not too long ago. On the OxCARRE [oxcarre.ox.ac.uk] website you'll find further research on Sovereign Wealth Funds and optimal savings of commodity export revenues.

Tuesday, December 2, 2014

OxCARRE Seminar: Thorvaldor Gylfason - The Dutch disease in reverse. Iceland's natural experiment

Today presenting at OxCARRE: Thorvaldor Gylfason (University of Iceland)

The Dutch disease in reverse: Iceland's natural experiment.

Abundant natural resources brought Iceland a systemically overvalued currency, with adverse effects on the secondary tradable sector. During 2003-2008 another national treasure, the sovereign’s AAA rating, was used to attract foreign capital, elevating the real exchange rate even further. The financial collapse in 2008 left the country with a large foreign debt without the possibility of rollovers in international capital markets. This offset some of the effect of the natural resources on the real exchange rate; in effect, this was the Dutch disease in reverse as witnessed, in particular, by a massive increase in the number of tourists in recent years. 

Monday, December 1, 2014

Sliding oil price and the solvency of governments

As the oil price continues to slide to lower levels, the potential effects on government finances becomes more evident, especially since the slide does not appear very likely to be reversed majorly [FT.com] in the near future. (Opec did not cut [FT.com], but the major new supply from unconventional oil in North America such as fracking and the Canadian oil sands is not profitably at the current levels. It is only natural that the this new production will be cut [econbrowser.com] if prices do not increase for other reasons.)

One major difference in how countries may handle this new reality comes from their exchange rate regime. Although the Russian rouble appears to be impacted most [FT.com], or at least receives the most attention, all currencies of oil exporting countries with flexible exchange rates have been tracking the fall of the oil price [FT.com]. In fact, the Russian central recently stopped defending the currency against depreciation recently making it in fact more free floating than previously. The fall in real revenues in terms of their domestic currencies is mitigated by the depreciated currencies. Since governments have a major part of their expenses in the local currencies, the impact of the fall in oil price is partially offset by simultaneous nominal exchange rate depreciation. However, debts to external creditors, in particular those denominated in foreign currency, will become harder to finance. So even countries with floating exchange rates will probably make some adjustments to their budgets.

In contrast, the Venezuelan Peso is fixed against the US dollar. As the central government is heavily reliant on the oil revenues for squaring its budget, the impact of the oil price is stronger [FT.com] relative to the floating exchange countries. Prices of it's bonds have tumbled, reaching an annual yield of close to 20%. Venezuela is reported as having argued the most strongly for an OPEC production cut in order to support the price, but countries that argued for this lost the decision as OPEC decided to leave production unchanged [FT.com].

It should be noted that the oil price dynamics functions more like a looking glass that reveals the true characteristics of governments and an economy. Although Norway may have to make some changes in their budget, their massive savings funds allows them any adjustment to be smooth and balanced. The decisions to manage revenues in this way have been taken years ago, exactly to account for a volatile oil price. The recent Russian assertiveness into its western neighbours, with the EU and US response just adds to the nervousness of the economic prospects. That Venezuela has been mismanaged for years becomes only clearer as the government runs out of cash to finance its unfortunate welfare programs.