Oil price pass-through into inflation

This paper uses data from 19 industrialized countries to investigate oil price pass-through into inflation across countries and over time. A time-varying pass-through coefficient is estimated and the determinants of the recent declining effects of oil shocks on inflation are investigated. The appreciation of the domestic currency, a more active monetary policy in response to inflation, and a higher degree of trade openness are found to explain the decline in oil price pass-through.     

Commodity price pass-through and inflation regimes

Does an increase in the energy and commodity prices drive consumer prices? The energy and commodity markets affect the inflation process through international trade. This poses policy implications for monetary policy to forecast inflation and also smooth the impact of international relative price movements. We investigate the pass-through of a broad range of agricultural and energy commodity prices to inflation across different inflation regimes. Our distinctive regime-varying methodology captures asymmetric response of inflation to the world commodity prices. We establish the first evidence of the pass-through of commodity prices to inflation across different periods of low and high inflation regimes and also stable and unstable inflation regimes. The results show that the duration of staying in an unstable inflation regime is smaller in the commodity markets. Both short-run and long-run pass-through of agricultural, food and energy commodities are higher compared to other commodities. The energy commodity particularly drives the inflation process for advanced economies, emerging economies and also the European Union countries. Overall, the dynamics of inflation and commodity prices change in the inflation environment, pointing to implications for conducting optimal monetary policy.     

Dynamic fuel price pass-through: Evidence from a new global retail fuel price database

We estimate the dynamic effects of crude oil price shocks on retail fuel prices, the pass-through, using the local projection approach of Jordà (2005). Using a novel monthly dataset of retail fuel prices in 162 countries over the period from 2000:1 to 2014:12, we find that: (i) retail gasoline prices respond positively to crude oil price shocks, but the responses vary across regions and income groups; (ii) there is also some variation across country groups in the persistence of the effects of crude oil price shocks on retail gasoline prices; and (iii) declines in crude oil prices lead to smaller effects on retail gasoline prices than increases in crude oil prices, pointing to an asymmetry in the fuel price pass-through.     

Impact of carbon cost on wholesale electricity price: A note on price pass-through issues

Carbon costs – either in the form of a carbon tax or through permit prices in an emissions trading scheme – would ultimately be reflected in higher electricity prices. Carbon cost “pass-through” is critical to the survival of existing coal generation assets and has been discussed widely as a measure of business impact in the electricity industry. This paper sets out in a structured way the factors that determine price pass-through and why this may differ greatly across different systems. Although the basic concept of price pass-through is simple, a clear understanding of the underlying factors is critical to developing insights on how carbon cost would impact on existing coal generation businesses. It is shown that pass-through can vary drastically if the underlying dispatch potential of generators varies significantly across alternative emissions reduction scenarios. It can also vary depending on the availability of competing cleaner forms of generation. Pass-through as a measure of business performance is, therefore, hard to generalize across different circumstances and should be interpreted carefully.     

Inflation target and (a)symmetries in the oil price pass-through to inflation

In this paper we employ state-space models to estimate the pass-through of oil price changes to consumer prices for a large sample of countries from 1970 to 2017. By controlling for self-selection bias and endogeneity and allowing for different responses to positive and negative price changes, we asses the differences between explicit inflation targeting (IT) countries and a control group. Surprisingly perhaps, our results suggest that the pass-through is higher for IT countries. Our main contribution is to show that these is mainly due to IT countries having a significant higher pass-through than non-IT countries when the oil price decreases: a 10% drop in oil price leads about a 0.11% drop in inflation in ITers (of which 4pp are explained by the monetary regime). Importantly, we show that adopting IT reduces the asymmetry of the pass-through. We run several robustness checks and conclude that falling oil prices are more welcomed by the central banks with an IT framework, in particular during deflationary episodes or when inflation is above the target.     

Oil price uncertainty in Canada

Bernanke [Bernanke, Ben S. Irreversibility, uncertainty, and cyclical investment. Quarterly Journal of Economics 98 (1983), 85–106.] shows how uncertainty about energy prices may induce optimizing firms to postpone investment decisions, thereby leading to a decline in aggregate output. Elder and Serletis (Elder, John and Serletis, Apostolos. Oil price uncertainty. http://ssrn.com/abstract=908675 (2009).] find empirical evidence that uncertainty about oil prices has tended to depress investment in the United States. In this paper we assess the robustness of these results by investigating the effects of oil price uncertainty in Canada. Our results are remarkably similar to existing results for the United States, providing additional evidence that uncertainty about oil prices may provide another explanation for why the sharp oil price declines of 1985 failed to produce rapid output growth. Impulse-response analysis suggests that uncertainty about oil prices may tend to reinforce the negative response of output to positive oil shocks.     

Oil price and inflation

An oil price rise would be expected to result in an immediate reduction by about 20% in the standard of living of the oil importing countries and a corresponding increase in that of the oil exporters. Since the price rises experienced during recent years have not been reflected in wage reductions, the result has been high, long-lasting inflation, which this paper shows will increase in the coming years to more than 20%. Measures taken by the oil importers include energy saving, which results in a still lower standard of living. If, instead, the industrialized countries increase production by increasing energy consumption and improving production efficiency, the effect of a rise in oil price will be compensated for in a few years.     

Oil backout and the price of electricity

In this paper, we examine the probable effect on electricity rates of an overbuilding strategy for several different types of utility companies. A computer simulation model is used to project the price of electricity that a hypothetical, oil-dependent, investor-owned, electric utility would have to charge in order to recover its annual costs and earn the allowed return on investment. The final results take the form of penalty/cost curves showing the values of the oil backout cost ratio for which overbuilding would lead to higher/lower rates.     

Oil price cycles and wavelets

The present paper addresses the question of the oil price-macroeconomy relationship using world data and a time scale decomposition based on the theory of wavelets. Our approach is based on a global indicator, the Morgan Stanley Capital International (MSCI) Index for the World, and on the new framework offered by wavelets to analyse the oil price cycles and to investigate the oil price-MSCI relationship. This original approach enables us to identify that the cycles which contribute the most to oil price variations are 20 to 40 years cycles, which correspond to the size of Kuznets infrastructure cycles and probably represent energy investment cycles. This wavelet decomposition also provides additional evidence to the “reverse causality” theory.     

Oil price uncertainty and unemployment

In this study, we empirically search the effects of oil price uncertainty and oil price shocks on U.S. unemployment rate using a GARCH-in-mean VAR model for the period 1974:q2–2017:q4. Based on our findings, we show that oil price uncertainty significantly increases unemployment rate in the U.S. economy. Likewise, our impulse-response analysis affirms that a positive oil price shock increases unemployment while the response of unemployment to a negative oil price shock is negative. Moreover, we reveal that unemployment rate reacts to positive and negative shocks asymmetrically. More specifically, the response of unemployment to negative oil price shocks is negative and slighter in size. Besides, oil price uncertainty is found to magnify the rise in the U.S. unemployment rate. These findings are in keeping with the real options theory which reveals that the uncertainty about goods' prices leads firms to postpone or abandon their production and investment and they seem to be robust to the use of different real oil price measures.     

Oil price risk and the Australian stock market

The primary aim of this paper is to investigate the sensitivity of Australian industry equity returns to an oil price factor over the period 1983–1996. The paper employs an augmented market model to establish the sensitivity. The key findings are as follows. First, a degree of pervasiveness of an oil price factor, beyond the influence of the market, is detected across some Australian industries. Second, we propose and find significant positive oil price sensitivity in the Oil and Gas and Diversified Resources industries. Similarly, we propose and find significant negative oil price sensitivity in the Paper and Packaging, and Transport industries. Generally, we find that long-term effects persist, although we hypothesize that some firms have been able to pass on oil price changes to customers or hedge the risk. The results have implications for management in these industries and policy makers and enhance our understanding of the “Dutch disease.”     

Oil price shocks and trade imbalances

This study aims to examine whether a large part of the variability of trade balances and their oil and non-oil components is associated with oil price fluctuations. The long-run causality running from oil price to overall, oil and non-oil trade balances and their short-run dynamics are investigated by applying the Toda and Yamamoto, 1995 (TY) causality approach and generalized impulse response functions (IRFs), respectively to the monthly data spanning from January 1999 to November 2011. Three Asian economies that represent three distinct characteristics in terms of oil are chosen and examined: Malaysia as an oil exporter, Singapore as an oil refinery and Japan as an oil importer. The stability of the causality is also checked and the estimated impulse responses across different periods are examined. The results have implications for both policy makers and economic modeling of the impact of oil price shocks.     

Wave energy resources along the Hawaiian Island chain

Hawaii's access to the ocean and remoteness from fuel supplies has sparked an interest in ocean waves as a potential resource to meet the increasing demand for sustainable energy. The wave resources include swells from distant storms and year-round seas generated by trade winds passing through the islands. This study produces 10 years of hindcast data from a system of mesoscale atmospheric and spectral wave models to quantify the wind and wave climate as well as nearshore wave energy resources in Hawaii. A global WAVEWATCH III (WW3) model forced by surface winds from the Final Global Tropospheric Analysis (FNL) reproduces the swell and seas from the far field and a nested Hawaii WW3 model with high-resolution winds from the Weather Research Forecast (WRF) model capture the local wave processes. The Simulating Waves Nearshore (SWAN) model nested inside Hawaii WW3 provides data in coastal waters, where wave energy converters are being considered for deployment. The computed wave heights show good agreement with data from satellites and buoys. Bi-monthly median and percentile plots show persistent trade winds throughout the year with strong seasonal variation of the wave climate. The nearshore data shows modulation of the wave energy along the coastline due to the undulating volcanic island bathymetry and demonstrates its importance in selecting suitable sites for wave energy converters.     

China on the move: Oil price explosion?

Rapid expansion of highway and jet traffic in China has created a surge of demand for oil products, putting pressure on world energy markets and petroleum product prices. This paper examines trends in freight and passenger traffic to assess how growth in China's transport demand relates to growth in China's economy, as well as the energy intensity of transport. Based on assumptions about demand elasticity and energy intensity, a range of scenarios is developed for China's oil demand through 2020. Incremental oil demand from China's transport sector is then compared with world oil demand projections to assess the likely impact on world oil prices. The finding is that new demand from China's transport sector would likely raise world oil prices in 2020 by 1–3% in reference scenarios or by 3–10% if oil supply investment is constrained.     

Oil price volatility and stock returns in the G7 economies

This study examines the relationship between oil price volatility and stock returns in the G7 economies (Canada, France, Germany, Italy, Japan, the UK and the US) using monthly data for the period 1970 to 2014. In order to measure oil volatility we consider alternative specifications for oil prices (world, nominal and real prices). We estimate a vector autoregressive model with the following variables: interest rates, economic activity, stock returns and oil price volatility taking into account the structural break in the year 1986. We find a negative response of G7 stock markets to an increase in oil price volatility. Results also indicate that world oil price volatility is generally more significant for stock markets than the national oil price volatility.     

Oil price shocks and industry stock returns

We examine the impact of changes in the oil returns and oil return volatility on excess stock returns and return volatilities of thirteen U.S. industries using the GARCH (1,1) technique. We find strong evidence in support of the view that oil price fluctuations constitute a systematic asset price risk at the industry level as nine of the thirteen sectors analyzed show statistically significant relationships between oil-futures return distribution and industry excess return. These industries are affected either by oil futures returns, oil futures return volatility or both. In general, excess returns of the oil-user industries are more likely to be affected by changes in the volatility of oil returns, than those of oil return itself. Volatilities of industry excess returns are time-varying, and return volatility for a number of sectors, appears to have long memory. Fama–French factors show universal statistical and high economic significance as risk factors influencing industry excess returns.     

Oil price shocks and agricultural commodity prices

While the impacts of oil price changes on agricultural commodity markets are of great interest to economists, previous studies do not differentiate oil-specific shocks from aggregate demand shocks. In this paper, we address this issue using a structural VAR analysis. Our findings indicate that the responses of agricultural commodity prices to oil price changes depend greatly on whether they are caused oil supply shocks, aggregate demand shocks or other oil-specific shocks mainly driven by precautionary demand. Oil shocks can explain a minor friction of agricultural commodity price variations before the food crisis in 2006–2008, whereas in post-crisis period their explanatory abilities become much higher. After crisis, the contributions of oil-specific factors to variations in agricultural commodity prices are greater than those of aggregate demand shocks. The results from an alternative SVAR confirm the robustness of our main findings.     

Oil price effects on personal consumption expenditures

This paper uses a logistic smooth transition model to examine the impact of rising oil prices on personal consumption expenditures in open and industrialized economies. The empirical results suggest a nonlinear and asymmetric relation between oil price changes and personal consumption expenditures. In particular, the effects of rising oil prices on personal consumption expenditures are greater than those of falling oil prices. While oil price changes affect personal consumption expenditures via real balance effects, smooth transition effects also come into play. Below a threshold value, an increase in oil prices reduces personal consumption expenditures. In other words, in the face of uncertainty regarding future oil prices, consumers initially rationally postpone spending. However, once oil prices above the threshold after a prolonged upward trend, the prices of domestic production factors rise. This fuels continued price hikes and further increases personal consumption expenditures until a cost-pushed inflation takes hold. Due to differences in economic developments and structures, the effects of rising oil prices vary from one country to another, with different countries usually to different monetary policies from each other. As a result, personal consumption expenditures also show various patterns across countries.     

Oil price,biofuels and food supply

The price of oil could play a significant role in influencing the expansion of biofuels, but this issue has yet to be fully investigated in the literature. Using a global computable general equilibrium (CGE) model, this study analyzes the impact of oil price on biofuel expansion, and subsequently, on food supply. The study shows that a 65% increase in oil price in 2020 from the 2009 level would increase the global biofuel penetration to 5.4% in 2020 from 2.4% in 2009. If oil prices rise 150% from their 2009 levels by 2020, the resulting penetration of biofuels would be 9%, which is higher than that would be caused by current mandates and targets introduced in more than forty countries around the world. The study also shows that aggregate agricultural output drops due to an oil price increase, but the drop is small in major biofuel producing countries as the expansion of biofuels would partially offset the negative impacts of the oil price increase on agricultural outputs. An increase in oil price would reduce global food supply through direct impacts as well as through the diversion of food commodities and cropland towards the production of biofuels.