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Ali AZZOUZ
MSc Asset Management
Petroleum Economics Engineer
Algeria
Email : ali_azzouz_iap@yahoo.fr
Title:
Content
1. Introduction………………………………………………………………............................……………....……
2. Causes of recent high oil prices and its evolution since 1999……………...............………
3. Impact of high oil prices on the global economy……………………………………........................
3.1. Impact of last oil shocks on the global economy………………………........................…….
3.1.1 Impact of the 1973-1975 oil shock on the world economy……………….................
3.1.2 Impact of the 1979 oil shock on the world economy………………………..................
3.1.3 Impact of the 1991 oil shock on the world economy……………………............................
3.2 The variables that can be affected from the increase in oil prices…...............……...
4. Analysing the changes in recent GDP “Gross Domestic
Product” with recent oil prices………………...……..........................……………….............…......
4.1 Variation of GDP in some important countries and in the world………...............................
4.1.1 Recent Variation on USA real GDP “Gross Domestic Products”………........................
4.1.2 Euro-zone Countries GDP and its variation…………………………...................……......
4.1.3 Variation on China’s GDP………………………………………………….............................…....
4.1.4 Changes in Japan GDP……………………………………………………...............................……..
4.1.5 Changes in World GDP……………………………………………….............................………......
4.2 The Impact of recent rise in oil prices on GDP growth………...............………............……...
5. Analysing the recent Inflation “Consumer Price Index”……………..................…...…………..
5.1 Variation of Inflation in some important countries and in the world…......................
5.1.1 Recent Variation on USA Inflation………………………………………….............................
5.1.2 Euro-zone Countries Inflation and its variation……………………..................….……..
4.1.3 Variation on China’s Inflation……………………………………………...........................….....
5.1.4 Changes in Japan Inflation……………………………………………............................….……....
5.2 Recent World Inflation and oil prices……………………………….......................………..….....
6. Analysing the changes in other macro-economic Variables with the recent oil
prices…………………………………………………………………………..........................................….…...
6.1 Interest Rate………………………………………………………………...................................…………....
6.2 Trade Balance…………………………............................................................................
Conclusion…………………………………………………………………………….................................…………....
References……………………………………………………………………………..................................…………....
1. Introduction:
The universe is made of cycles, all things are related to each other, and all things are going or
seeking for equilibrium. Such are the oil prices; they are strongly related to many things. In a free
market environment where the competition dominates, the oil prices change mainly with the
change in supply and demand either a shift in supply or demand or an increase or decrease in one
of them affect the oil prices. And the change in oil prices has an output to the global economy.
Many theories studied the phenomena and agreed that when oil prices exceed a certain level will
strongly affect the economy and the more sudden and the more rapid the prices increase the
more significant their effect on the economy [1] [2]. In The recent years there have been an
increase in oil prices and has reached more than $72 per barrel in 08/2006 [3], the question is: has
this increase of oil prices reached the level to hurt the economy? In other words: has this recent
high oil prices really affected the global economy?
2. Causes of recent high oil prices and its evolution since 1999
Since 1999 oil prices started to increase to reach nearly $72 per barrel in 08/2006 [3] and many
factors have put forward to explain these extreme movements in oil prices. Among these factors,
the rising demand of oil (US and China demand), low stocks (oil companies are trying to became
more efficient by operating with very low stocks), OPEC strategy (Managing its supply), action of
speculation, violence in the Middle East, other political tension in non Middle East countries such
as Nigeria and Venezuela and Insufficient US refining capacity (low US gasoline stocks) have helped
in driving world crude oil price. [4]
70
60
50
40
30
20
10
0
1978
1997
1997
1997
1997
1998
1998
1998
1998
1999
1999
1999
1999
2000
2000
2000
2000
2001
2001
2001
2001
2002
2002
2002
2002
2003
2003
2003
2003
2004
2004
2004
2004
2004
2005
2005
2005
2005
2006
2006
2006
Source: Data extracted from EIA (Energy Information Administration) [3]
This graph shows the movement of oil prices since 1978 and the recent increase in oil prices has
started from 1999 to go down in 2002 and started again to rise until 2006 to reach nearly $72 per
barrel. We can see that from 2002 to 2006 the oil prices were more than doubled.
Oil and gas are an important part of our everyday life, they heat and cool our homes and provide
electricity. Many other products are made from oil and gas, including plastics, medications,
clothing, cosmetics and many other items we may use daily. In addition to individual consumption
of oil and gas, the industrial sector, transportation sector…etc which rely mainly on oil and gas.
3.2 The variables that can be affected from the increase in oil prices
Global economy has experienced three oil shocks which were followed by economic recessions
where many macroeconomic variables were affected. As oil is an important source of energy in
nowadays world, the changes in its prices have an important role in the global economy.
If oil prices rise, individual and national expenses will rise which means oil prices are very
important to the health of the global economy.
Many experts analysed the impact of high oil prices on the global economy and they have found
that many factors will change with the change in oil prices. High oil prices affect the global
economy through a variety of channels; as summarised on the diagram bellow: [5] [6] [2]
Increase in unemployment
Figure 2: The variables that change with the rise in oil prices, [5] [6] [2]
We can summarise from this table that the changes in GDP started from 1999 with 4.4% to reach
0.8% in 2002. The US economy has slowed down that time, a decrease of more than 3% in its GDP
growth. This decrease in GDP coincided with the rise in oil prices as shown on Figure 1. From 2002
until 2004 there was a recovery in US economy, its real GDP growth has increased from 1.6% in
2002 to reach 4.2% in 2004. As oil prices raised from 2004 to 2006 the US real GDP went down
from 4.2% in 2004 to 3.4% in 2006.
This recent rise in oil prices has affected partly the US Real GDP in a way that the decrease in US
real GDP coincided with the rise in oil prices. This in tow periods, the first period was from 1999 to
2001 and the second period was from 2005 to 2006.
The Euro-zone countries real GDP growth started to went down from 3.8% in 2000 to reach 0.7%
in 2004 and went up to 2.1% in 2004 than down to 1.3% in 2005. As we can see the variation in
GDP in the Euro-zone countries is much more important than that of USA in this period of time.
We can also see from this table and figure 1 that almost all these fluctuations on GDP coincided
with the changes in oil prices.
China’s GDP did not come down until 2004, this slight drop of GDP, 10.1% in 2004, 9.9% in 2005 to
9.5% in 2006 may has a relation with the oil prices as they have risen from 2004 to 2006 (see
figure:1). And as some experts suggest that the oil prices do not have a big impact on Chinese
economy because its level of dependence on international oil is 20%, which is still lower [11].
From this data it can be seen that the Japanese economy was not much influenced by the recent
rise in oil prices. A little drop in its GDP was seen in 2001 and 2002.
From this table we can see the overall GDP which is the world growth in recent years which came
down in 2001 and 2005. The recent two rises in oil prices (Figure 1) are followed by a slight drop in
world growth.
70
60
50
40
30
20
10
0
1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: Data extracted from EIA (oil prices) and IMF (GDP) [3] [4]
The graph shows the variation in recent oil prices with the Worldwide GDP, a big increase of oil
prices faced by small fluctuations on GDP, which means this recent changes in oil prices did not
really influenced the Worldwide GDP Growth.
Figure : 4
3,5
2,5
1,5
0,5
0
1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: Data extracted from the World Economic Outlook April 2006 IMF [10]
This chart shows clearly how US inflation changed with the change in oil prices (see figure: 1 for oil
prices).
One increase in oil prices was in 1999 and the other from 2003, as figure 5 shows, the inflation
increased in 1999 and from 2003 to 2005.
The recent increases of oil prices have not influenced the Euro-zone countries Inflation at all. As
shown on this table, only the rise in oil prices of 1999 which affected a little the inflation, an
increase from 1.1% to 2.1% in 2000 than remained nearly constant.
The impact of the rise of oil prices on inflation is clear in China’s case, the inflation increased from
-1.4% in 1999 to 0.4% in 2000 and from – 0.8% in 2002 to 3.9% in 2004. Thus the China’s inflation
has changed a lot since the oil prices start to rise in 1999.
The main change in Japanese inflation is from 2005 to 2006 as shown on the table.
12,00
10,00
8,00
6,00
4,00
2,00
0,00
1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: Data extracted from the World Economic Outlook April 2006 IMF [10]
Figure: 6 summarise the changes in Consumer Prices in both blocs in the world, the Advanced
Economies such as USA, Japan, Euro Area,… etc and the Emerging Markets and developing
countries such as Middle east, Central and eastern Europe, developing Asia, Africa,…etc
70
60
50
40
30
20
10
0
1998 1999 2000 2001 2002 2003 2004 2005 2006
If we compare the evolution of inflation since 1998 (figure: 6) and the evolution of oil prices
(figure: 7), we will see clearly the impact of oil prices on the inflation.
Oil prices rose from nearly $25 per barrel in 2002 to reach more than $70 per barrel in 2006, and if
we look to the changes occurred on inflation, we will see that the Advanced Economies Inflation
rose slightly from 2002 to 2006 and that of Emerging Markets and developing countries was still
going down but the rate of the decrease was very small compared with the years before.
If we compare this recent variation in inflation with that in periods of oil shocks discussed already,
we can conclude that the changes occurred in inflation in recent years are not so important,
because when oil shocks happened the inflation doubled even tripled in some cases.
5,00
4,50
4,00
3,50
3,00
2,50
2,00
1,50
1,00
0,50
0,00
1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: Data extracted from the World Economic Outlook April 2006 IMF [10]
If we compare this figure with the figure: 7 of oil prices, we will see that when oil prices rose in
1999-2000 the interest rate also rose, and the same thing happened from 2003 to 2006.
The impact is small but we can not ignore it, because a small change in the interest rate hurt the
rate of investment therefore the employment.
100,00
0,00
1998 1999 2000 2001 2002 2003 2004 2005 2006
-100,00
-200,00
-300,00
-400,00
-500,00
-600,00
-700,00
Source: Data extracted from the World Economic Outlook April 2006 IMF [10]
If we compare this figure which is the evolution of Advanced Economies Trade Balance with the oil
prices (figure 7) we will see that the oil prices have a very big impact on the trade Balance. Some
advanced Economies were net exporter until 1999 while the oil prices rose and the majority of
Advanced Economy countries shifted from the net exporter to the net importer. And the financial
value of the imports continues to increase as oil prices increase.
Conclusion:
In the analysis we have analysed the movement of the main macroeconomic variables in the
recent years while oil prices have increased, and we have seen that almost all the variables in all
over the world have changed and have affected by the recent oil prices, but not a level to drive the
global economy into a recession.
The last oil price shocks have driven the economy into recessions, nearly the same scenario was
happened in the recent years, the price of oil was more than doubled, from $30 a barrel to more
than $70 a barrel but the economy did not go into recession, what is the exception this time? I
believe that the reason was the period of time in which the oil prices reach the high level and their
speed of increase. In the past recessions the oil prices took a few months to double but in the
recent years the movement of oil prices was more gradual which was extended over several years
(from 2002 to 2006).
References:
[1] The Effects of Oil Shocks on the Economy: A Review of the Empirical Evidence, Marc Labonte,
June 2004: http://www.taxpayer.net/energy/pdf/CRS_Report-
Oil_Shocks_Jun04.pdf#search=%22CRS%20Report%20for%20Congress%20oil%20shocks%22
[2] Past oil prices shocks: Political background and economic impact, evidence from three cases
by Pascal Ditté and Dr Peter Roell: http://www.isn.ch/pubs/ph/details.cfm?lng=en&id=20499
[3] EIA: http://tonto.eia.doe.gov/dnav/pet/pet_pri_wco_k_w.htm
[4] Html Document: http://news.bbc.co.uk/2/hi/business/3708951.stm
[5] Analysis of the Impact of High Oil Prices on the Global Economy (International Energy
Agency) May 2004:
http://www.iea.org/textbase/papers/2004/high_oil_prices.pdf#search=%22the%20economic%20
effects%20of%20high%20oil%20prices%22
[6] The impact of Higher Oil Prices on the Global economy (International Monitory funds)
Prepared by the research department and approved by Michael Mussa, December 8, 2000:
http://www.imf.org/external/pubs/ft/oil/2000/oilrep.PDF#search=%22impact%20of%20oil%20pri
ces%20on%20the%20global%20economy%22
[7] Glossary: www.tepper.cmu.edu/afs/andrew/gsia/investclub/Glossary.htm
[8] National Statistic Glossary: http://www.statistics.gov.uk/about/glossary/economic_terms.asp
[9] Encyclopedia Wikipedia: http://en.wikipedia.org/wiki/GDP
[10] World Economic Outlook April 2006, IMF, International Monitory Funds:
http://www.imf.org/external/pubs/ft/weo/2006/01/pdf/weo0406.pdf
[11] HTML Document: Rising Oil Prices Effect on china’s Economy:
http://english.peopledaily.com.cn/english/200009/15/eng20000915_50569.html
[12] Trader Glossary: http://www.trader-soft.com/option-trading/option-glossary/i.html
[13] Encyclopedia Wikipedia: http://en.wikipedia.org/wiki/Inflation
[14] HTML Document: http://inflationdata.com/inflation/Articles/Difference.asp
[15] Energy Information Administration (EIA) :
http://www.eia.doe.gov/emeu/security/sld002.htm
[16] Encyclopedia Wikipedia: http://en.wikipedia.org/wiki/Interest_rate
[17] Glossary: http://www.fhb.com/loans-mort-glossary.htm
[18] Encyclopedia Wikipedia: http://en.wikipedia.org/wiki/Trade_balance