Energy and the Economy: The Macroeconomic Impact

Central Bank of Trinidad and Tobago

Energy and the Economy:The Macroeconomic Impact

Shelton Nicholls

Deputy Governor

UWI Conference on the Economy

October 8-9 2008


Outline of Presentation

1. Energy Sector and the Macroeconomy: Theoretical Perspectives

2. Energy Sector and Macroeconomic Linkages

3. Energy Sector and Macroeconomy : Some Performance Measures

4. Macroeconomic Management

5. Current Risks in Global Environment


1.0 Energy Sector and the Macroeconomy: Theoretical Perspectives

• Development is constrained by low levels of investment. Access to capital and foreign exchange from the energy sector could help to “push” or propel growth. [Lewis, Rostow, Rosenstein-Rodan, Roemer]

• Natural resource abundance can have a negative impact on economic growth and development if not managed optimally. [Auty, Gelb]

• Riding the crest of the product cycle which may imply deriving optimal benefits from the energy sector. [Farrell]


1.1 Key Issues from Theoretical Perspectives

• Dependence on energy can make economic performance susceptible to economic shocks.

• Resource boom can result in a decline in the tradeable sector and an expansion in the non-tradeable sector.

• Inflows of significant foreign exchange resources could lead to real exchange rate appreciation and impact competitiveness in the non-energy sector.


2.0 Energy Sector and Macroeconomic Linkages

2.1 Macroeconomic Linkage Diagram

2.2 Main features of Linkages


2.1 Macroeconomic Linkage Diagram

Output

Energy GDP

Non-Energy GDP

Energy Exports

Non-Energy Exports

Oil & Gas Prices

DOMESTICPRICES

Consumption

Investment

Oil & Gas Reserves

Energy Revenue

Non-Energy Revenue

Overall Fiscal Balance

Non-Energy Balance

Monetary Aggregates

Money/Financial Markets

Fiscal Sector

Employment


2.2 Main features of Linkages

• High energy prices in an environment of increasing energy production raises export earnings and increases tax revenues.

• Increased tax revenues helps to bolster government expenditure envelope.

• Increased expenditure in tradeable sector could expand investment, output and employment.

• Expansion in non-tradeable activities could have distortionary effects on investment, aggregate demand, labour market and prices.


3.0 Energy Sector and the Macroeconomy: Some Performance Measures

3.1 Energy and National Output

3.2 Energy Sector and Trade

3.3 Energy Sector and Fiscal Accounts


3.1.0 Energy Sector and Output

• More diversified energy sector since onset of first oil boom in 1970s.

• Energy sector output continues to dominate total output.

• Energy sector employs a relatively small share of the labour force.


3.1.1 Distribution of GDP

1975

Services 46.9%

Energy 42.1%

Manuf 6.1%

Agri 4.9%

2008

Services47.7%

Energy46.7%

Manuf5.3% Agri

0.3%


3.1.2 Distribution of Energy GDP

1975

Oil & Gas 100%

Petrochemical 0%

2008

Oil & Gas 83%

Petrochemical 17%


3.1.3 Energy Output as a per cent of GDP

1975 1985 1995 2000 2005 2007 2008

Energy GDP/Total GDP 44.1 26.7 27.5 31.3 41.7 45.8 46.3

of which:

Oil and Gas GDP/ Total GDP

44.1 26.7 15.9 22.9 34.8 32.9 33.8

Petrochemical GDP/ Total GDP

n.a. n.a. 5.8 4.2 6.0 7.2 6.7

Memo

Energy Employment to Total Employment

n.a. n.a. 3.7 3.2 3.4 3.7 3.1*

* Represents data for Q1 2008.


3.1.4 Contribution of Tradeable and Non-tradeable Sectors to Total GDP

1975 1985 1995 2000 2005 2007 2008

TRADEABLE

Agriculture 5.0 2.4 2.3 1.4 0.5 0.4 0.3

Manufacturing 6.3 7.3 8.2 7.1 5.3 5.8 5.2

NON-TRADEABLE

Construction 7.6 11.2 7.8 7.5 7.4 8.3 9.4

Distribution 12.5 12.2 14.0 16.4 11.9 12.3 11.4

Finance, Insurance

and Real Estate 6.9 12.1 12.3 14.2 11.6 10.9 11.1

Government 8.5 15.2 2.1 1.6 6.6 6.4 6.2

Other 12.8 17.5 24.1 21.1 10.6 9.5 9.2


3.2.0 Energy Sector and Trade

• Energy exports continue to dominate extra-regional and intra-regional exports.

• Sharp increases in energy prices in the new millennium.

• Significant volatility exhibited in energy prices over last four (4) decades.

• Decade of 1970s: High energy prices resulted mainly from supply side restrictions.New millennium: Booming global demand, especially by China and India, and increasing speculation contributed largely to high energy prices.


3.2.1 Contribution of Energy Exports

1975 1985 1995 2000 2005 2007

Energy Exports / Total Exports

52.5 91.9 72.4 81.2 91.0 86.7

Energy Exports to CARICOM / Total Exports

3.6 8.6 9.7 13.1 16.4 8.6

Energy Exports to Non-CARICOM / Total Exports

96.4 91.4 90.3 86.9 83.6 91.4


3.2.2 Energy and Gas Prices

0

20

40

60

80

100

120

140

160

US$

/bbl

0

2

4

6

8

10

12

14

16

US$

/mm

btu

Oil - WTI(left axis)

Natural Gas - Henry Hub(right axis)


3.2.2 Energy and Gas Prices

0

20

40

60

80

100

120

US

$/b

bl

Oil - WTI

0

1

2

3

4

5

6

7

8

9

10

US

$/m

mb

tu

Natural Gas - Henry Hub


3.2.3 Real Effective Exchange Rate(year-on-year changes)

-25

-20

-15

-10

-5

0

5

10

15

per

cent


3.3.0 Energy Sector and Fiscal Accounts

• Energy revenue still accounts for a significant proportion of government revenues.

• Non-energy revenue has however been increasing over time with the expansion in the non-energy sector.

• Heritage and stabilisation fund provides a viable avenue for increased savings and for lessening demand pressures.


3.3.1 Energy Revenue and Expenditure(in per cent of GDP)

1975 1985 1995 2000/2001 2006/2007 2007/2008

Total Revenue 34.1 34.9 27.4 25.9 30.0 35.5

Of which:

Energy Revenue 25.0 13.5 8.2 9.7 16.7 19.4

Non-Energy Revenue 9.1 21.4 19.2 16.2 13.3 16.1

Total Expenditure 23.9 42.4 27.2 24.2 28.3 32.2

Recurrent 16.9 33.4 25.2 22.5 22.4 25.5

Capital 7.0 9.0 2.0 1.7 5.9 6.7

Overall Balance 10.2 -7.5 0.2 1.6 1.7 3.2

Non-Energy Balance -14.7 -21.0 -8.0 -8.1 -14.9 -16.2

1. In 1997 the central government's reporting of the fiscal operations was changed from calendar year to fiscal year.

2. Energy revenue between 1975-2000 excludes receipts from petrochemical companies.


3.3.3 Official Reserves, HSF and Import Cover

0

2

4

6

8

10

12

14

2000 2001 2002 2003 2004 2005 2006 2007 Sep-08

Import Cover(months)Gross Official Reserves

(In billion US$)

Heritage and Stabilization Fund


4.0 Macroeconomic Management

• Managing the existing buoyant economic environment requires focused attention on:

1. Expanding the absorptive capacity of the economy via focus on expanding the non-energy tradeable sector (agriculture, financial services, tourism).

2. Managing rapid appreciation of the nominal and real exchange rates so as to sustain competitiveness of the economy.




3. Managing inflationary pressures arising from rapid growth in aggregate demand.

4. Investing additional energy resources to provide for inter-generational savings and to smoothen consumption.




5. Creating an enabling environment for private sector investment:

– Provision of appropriate economic and social infrastructure (education, health, physical infrastructure).

– Maintaining a consistent and transparent policy framework.


5.0 Current Risks in Global Environment

• Strong likelihood of slower economic growth could dampen demand for energy and exert downward pressure on oil prices.

• Current financial market turmoil has already depressed yields in global financial markets and could lead to lower returns on financial capital.


END OF PRESENTATION

Documents

Energy and the Economy: The Macroeconomic Impact