Impact of World Oil Price Change

Impact of World Oil Price Change

In our analysis we used to understand the  impact  of  price rises  (world  prices)  on  the economy   of   Bangladesh   in   terms   of   a) micro-economic indicators   -   like consumption, investment, government expenditure, and  export  and  imports,  b)inflation, c) poverty and d) government’s budget deficit.

1. World Oil Price Scenarios

A total of five different world oil price scenarios have been used to simulate impact of world oil price changes.  The base scenario (BASE) is set to understand ‘what  if’ the world oil price remains where it was in 2002 prior to price rise. This can be compared with reduced oil demand (ROD) scenario in which price of oil was set  to rise until it triggers a change in the demand for oil and people switch to substitute sources of energy (such as gas in Bangladesh). Next is the Business As Usual (BAU) scenario under which price of oil is set to the level of 2006 at 70$ per barrel and stays like that until 2020. Next is the supply shock  (SUS) scenario under which it is assumed that rising oil price will lead to higher investment in the oil sector and consequently a gradual supply increase will take place from 2011 and onward leading to decrease in world oil prices. Finally the Peak Oil demand  (PKO) scenario assumed that the trend in world oil price is going to sustain because world demand for oil is increasing rapidly and so world oil price will gradually  rise[pic 1]

up to 190$ per barrel in 2020. However, it is also assumed that with increased oil prices, countries might find a substitute and reduce their oil demand. In terms of the broad picture, base scenario assumed an average price of $33 per barrel of oil, under the ROD scenario price will be $55 per barrel, it is $65 per barrel under BAU scenario and it is $85 and $107 per barrel under SUS and PKO scenarios. The price scenarios used in this simulation are shown in Figure 3.1 above.

1. Impact on inflation

Oil is an input in the process of production. Consequently, it is expect that increase in the oil price will increase the cost of production and hence will lead to a supply shift in the aggregate economy leading to cost-push inflation.

Table 3.1: Inflation rate due to world price changes

Source: BANSIM II, 2007

Table 3.1 shows that impact on inflation is also intuitively clear. Average rate of inflation under BASE scenario is very low (given ceteris paribus), while it grows to

4.48 percent due to increased oil prices under ROD scenario, it grows further to

4.97 percent under BAU scenario. However, if oil prices continue to rise (as is under SUS until 2011) the rate of inflation increases to nearly 20.80 percent in 2011. Under PKO scenario, inflation increases to 6.4 percent from the base scenario of 0.65 percent. In terms of year to year comparison, in Bangladesh, SUS will have a significantly negative impact on inflation until 2011. Under other scenarios inflation will rise up to 8.

 3.3 Impact on GDP

Rise in world oil process is expected to have impacts on GDP and its growth rate. Figure 3.2 shows the impact of world oil price increase on GDP of Bangladesh.    In

47 percent in the short run (until 2007) and then it will start falling (given ceteris paribus).

[pic 2]

terms of GDP growth rate the Figure 3.2 shows that the base line scenario provides the highest growth rates for Bangladesh.

Table 3.2: Changes in GDP growth rate due to world oil price rise

NOTE: GDP growth rates in percentage terms. Results from BANSIM II simulation.