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

A. Oil & the Macroeconomy: New Developments since

Blanchard-Gali

B. Measuring Diversification

C. Impact of U.S. Energy

Boom

A. No longer about just oil: Diversification in sources

(natural gas; US energy boom)

B. Depend, but Diversify

C. Don’t Get Carried Away

by the Shale Gale

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

Oil price shocks did play an important role in the

stagflation of the 1970s

But there have been changes since:

Our luck may have changed for the better

Real wages are less rigid

Monetary policy response is better

Share of oil in production & consumption is lower

Net result: oil price shocks have smaller effects on output and

inflation in the 2000s than in the 1970s (Blanchard & Gali, 2009;

Blanchard and Riggi, 2010)

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

( ) *100i

i

NPICSI

C

max{0, }i ij ijNPI M X

Global Oil Diversification

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Oil Supply DI

Global Gas Diversification

5.0

7.0

9.0

11.0

13.0

15.0

17.0

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Natural Gas Supply DI

Diversification index for oil

0.00

5.00

10.00

15.00

20.00

25.00

Den

mar

k

Can

ada

Aus

tralia

Uni

ted

Kin

gdom

Uni

ted

Stat

es

Fra

nce

New

Zea

land

Spai

n

Por

tuga

l

Ital

y

Net

herlan

ds

Ger

man

y

Kor

ea

Aus

tria

Irelan

d

Japa

n

Swed

en

Belgi

um

Tur

key

Gre

ece

Switze

rlan

d

Cze

ch R

epubl

ic

Fin

land

Polan

d

Hun

gary

Slov

ak R

epub

lic

Diversification index for natural gas

0.00

5.00

10.00

15.00

20.00

25.00

Den

mar

k

Net

herlan

ds

Uni

ted

Stat

es

Uni

ted

Kin

gdom

Fra

nce

Belgi

um Ital

y

Polan

d

Ger

man

y

Spai

n

Switze

rlan

d

Hun

gary

Aus

tria

Swed

en

Cze

ch R

epubl

ic

Gre

ece

Irelan

d

Por

tuga

l

Japa

n

Fin

land

Slov

akia

Diversification: the bottom-line

-

Natural Gas

Crude Oil

1 to 6 7 to 13 14 to 19

Ranking

Vulnerability Low Medium High

Low France, US, UK Spain, Portugal 1 to 8

Medium Italy

Austria,

Germany,

Japan, Ireland

Sweden

9 to 18

High Belgium, Poland Switzerland,

Hungary

Czech

Republic,

Finland,

Greece,

Slovak

Republic

19 to 26

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)

0

20

40

60

80

100

120

140

160

93 94 95 96 97 98 99 00 01 02 03 04 05

Gas

Oil

1a. United States: Gas, Oil

0

20

40

60

80

100

120

140

160

93 94 95 96 97 98 99 00 01 02 03 04 05

Gas

Oil

1b. Germany: Gas, Oil

0

20

40

60

80

100

120

140

160

93 94 95 96 97 98 99 00 01 02 03 04 05

United States

Germany

1c. Gas: United States, Germany

0

20

40

60

80

100

120

140

160

93 94 95 96 97 98 99 00 01 02 03 04 05

United States

Germany

1d. Oil: United States, Germany

Source: Loungani and Matsumoto, 2014

… but a decoupling since 2005 (index; 2005 = 100, January 2006 to February 2013)

0

50

100

150

200

250

300

06 07 08 09 10 11 12 13

Gas

Oil

2a. United States: Gas, Oil

0

50

100

150

200

250

300

06 07 08 09 10 11 12 13

Gas

Oil

2b. Germany: Gas, Oil

0

50

100

150

200

250

300

06 07 08 09 10 11 12 13

United States

Germany

2c. Gas: United States, Germany

0

50

100

150

200

250

300

06 07 08 09 10 11 12 13

United States

Germany

2d. Oil: United States, Germany

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.

Medium-Term Impact of U.S. Energy Boom on the U.S.

Impact on the United States (percent)

23 Source: IMF staff calculations.

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

Medium-Term Impact of U.S. Energy Boom on Others

24 Source: IMF staff calculations.

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)

Thank you

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IMF Commodities Team: Prakash Loungani, Rabah Arezki, Akito Matsumoto,

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