Abstract
The purpose of this contribution is to illustrate the interaction between oil prices and the global savings equilibrium which can invert the usual IS type relationship between growth and interest rates. Higher growth is usually associated with higher interest rates. But higher growth leads to also to higher oil prices and hence to higher savings by oil producers. This mechanism might explain the ‘conundrum’ noted by Bernanke that during the last expansion global interest rates remained relatively low despite robust growth. Moreover, it has interesting implications for how one views the huge US current account deficit and how the emergence of China’s savings surplus and oil supply shocks impact the global economy. We show that the new equilibrium is not only located at a lower interest rate but also at a lower growth rate than without the China effect. Finally, we argue that the lower real interest rates resulting from excess OPEC savings have facilitated the adjustment to the subprime crisis.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
The argument posits that an oversupply of savings - particularly in Emerging Asia—helped to generate a US current account deficit as the savings had to flow somewhere, and the US was the willing and—due to its huge and non-fragmented bond market, also a capable recipient of the savings.
For a deeper analysis of the relation between the huge savings rate and the current account surplus in China and the Far East in general, see Park and Shin (2009).
See, for instance, Bernanke (2005). In 1998, the fall in oil prices helped Asia and hurt the oil exporters; in 2000 the rise in oil prices helped the oil exporters and hurt Asia. And way back in 1980, Asia ran a deficit that helped offset the oil exporters’ surplus.
Note that the variable y denotes the deviation from the “normal”growth path. More specifically, it is the relation of output to normal output.
Energy and in particular oil demand depends on appliances, their number and their technical efficiency. This existing stock of appliances limits short run adjustments to behavioral adaptations and implies that time constants of many years if not decades (see, e.g., the thermal efficiency of buildings) characterize long run adjustments. See Wirl (2009), p. 5.
The supply side faces substantial lead times for new oil fields, pipelines, alternative energy carriers, new power plants, etc. that limit short run expansions of output. There are enormous lead times between the initial discovery of a new oil reservoir and the time at which the new oil is actually being delivered to a refinery to use. These lags mean that, in the absence of significant excess production capacity, the short-run price elasticity of oil supply is also very low, another factor contributing to the potential price implications of supply disruptions (analyzed by us in Section 4). See Hamilton (2008a), p. 25, Wirl (2009), p. 5, and Wurzel et al. (2009).
“In other words, it is the confluence of demand and supply factors that determines the effects of shocks to the oil market” (Dvir and Rogoff 2009, p. 34).
There is indeed a marked difference between the EU and the US in terms of oil consumption: the US has been responsible for almost one-quarter of the global increase in oil consumption from 1994 to 2004, against less than 10 % for the EU. See Gros et al. (2006), p. 60.
Equation (5) represents a reduced form many analysts usually think about. Without loss of generality but also without changing the character of our results, it could have been explicitly derived by the New Open Economy Macroeconomics (NOEM) three equations block.
There are many views (Matt Simmons’ 2005 “Twilight in the Desert” being the most prominent) that argue that the supply curve is kinked so that the years of plentiful and inexpensive oil supplies are over and that the future holds a much more difficult and expensive search for new sources of oil capacity. If one considers, in addition, that the likely sources of new capacity are in the areas of the world where geopolitical risk is higher, the view that supply will be available at the same conditions as in the past has to be qualified to a large extent.
We choose φ = 1 just for simplicity reasons. Changes in the parameter values of φ do not alter our main results.
For the empirical relation between oil prices and stock market performance see, for instance, El Hedi Arouri and Rault (2010).
References
Akram QF (2009) Commodity prices, interest rates and the dollar. Energy Econ 31(6):838–851
Angell WD (1992) Commodity prices and monetary policy: what have we learned? Cato J 12:185–192
Barsky RB, Kilian L (2002) Do we really know that oil caused the great stagflation? A monetary alternative. In: Bernanke B, Rogoff K (eds) NBER Macroeconomics Annual May, pp. 137–183
Belke A, Gros D (2007) China and India—long-term implications for the EU, Paper presented at the International Conference on India and China’s Role in International Trade and Finance and Global Economic Governance, ICRIER and IMF, December 6–7, Delhi
Belke A, Gros D (2010) Global liquidity, world savings glut and global policy coordination, background papers, jeddah economic forum 2010. Jeddah/Saudi, Arabia, pp 5–20
Bernanke B (2005) The global saving glut and the U.S. current account deficit. Homer Jones Lecture, St. Louis
Bernanke B (2007) Global imbalances: recent developments and prospects. Bundesbank Lecture, Berlin
Blanchard OJ, Galí J (2007) The macroeconomic effects of oil shocks: why are the 2000s so different from the 1970s? NBER Working Paper 13368. National Bureau of Economic Research, Cambridge
Blanchard OJ, Riggi M (2009a) Why are the 2000s so different from the 1970s? A structural interpretation of changes in the macroeconomy effects of oil prices, NBER working paper 15467. National Bureau of Economic Research, Cambridge
Blanchard O, Riggi M (2009a) The oil price and the macroeconomy: what’s going on? VoxEU, December 7, web: http://www.voxeu.org/index.php?q=node/4341
Broadbent B, Daly K (2009) The savings glut, the return on capital and the rise in risk aversion, global economics paper 185. Goldman Sachs Global Economics—Commodities And Strategy Research, New York
Brown SPA, Yücel MK (1999) Oil prices and U.S. aggregate economic activity: a question of neutrality. Econ Financial Rev, Federal Reserve Bank of Dallas, Second Quarter, pp. 16–23
Cooper JCB (2003) Price elasticity of demand for crude oil: estimates for 23 countries. OPEC Rev 27(1):1–8
Dahl CA (1993) A survey of oil demand elasticities for developing countries. OPEC Rev 17:399–419
Dvir E, Rogoff KS (2009) Three epochs of oil, NBER working paper 14927. National Bureau of Economic Research, Cambridge
El Hedi Arouri M, Rault C (2010) Oil prices and stock markets: what drives what in the gulf corporation council countries? CESifo Working Paper 2934. CESifo, Munich
Faria JR, Mollick AV, Albuquerque PH, León-Ledesma (2009) The effect of oil price on China’s exports. China Econ Rev 20:793–805
Frankel J (2008) The effect of monetary policy on real commodity prices. In: Campbell J (ed) Asset prices and monetary policy. University of Chicago Press, pp. 291–327
Gately D (2004) OPEC’s incentives for faster output growth. Energy J 25:75–96
Gately D, Huntington H (2002) The asymmetric effects of changes in price and income on energy and oil demand. Energy J 23(1):19–55
Greenspan A (2005) Testimony before the Committee on Financial Services. U.S. House of Representatives, February 17
Gros D, Mayer T, Ubide A (2006) A world out of balance? Special report of the CEPS macroeconomic policy group. Centre for European Policy Studies (CEPS), Brussels
Hamilton JD (2008a) Understanding crude oil prices, NBER working paper 14492. National Bureau of Economic Research, Cambridge
Hamilton JD (2008b) Causes and consequences of the oil shock of 2007–08, NBER working paper 15002. National Bureau of Economic Research, Cambridge
Higgins M, Klitgaard T, Lerman R (2006) Recycling petrodollars. Curr Issues Econ Financ 12(9), Federal Reserve Bank of New York, December
Hotelling H (1931) The economics of exhaustible resources. J Polit Econ 39(2):137–175
IMF (2006) World economic outlook, chapter II, oil prices and global imbalances. International Monetary Fund, Washington, pp 71–95
Kilian L (2008) The economic effects of energy price shocks. J Econ Lit 46(4):871–909
Obstfeld M, Rogoff K (2009) Global imbalances and the financial crisis—products of common causes, CEPR discussion paper 7606. Centre for Economic Policy Research, London
Park D, Shin K (2009) Saving, investment, and current account surplus in developing Asia, ADB economics working paper series 158. Asian Development Bank, Manila
Rasche RH, Tatom JA (1977) The effects of the new energy regime on economic capacity, production and prices. Econ Rev, Federal Reserve Bank of St. Louis 59(4):2–12
Rasche RH, Tatom JA (1981) Energy price shocks, aggregate supply and monetary policy: the theory and international evidence. Carnegie-Rochester Conf Ser Publ Pol 14:9–93
Sánchez M (2011) Oil shocks and endogenous markups: results from an estimated Euro Area DSGE model. IEEP 8:247–273
Simmons MR (2005) Twilight in the desert—the coming saudi oil shock and the world economy. John Wiley & Sons, New Jersey
Welfens PJJ (2008) Portfolio modelling and growth in open economies. IEEP 5(3):237–253
Wirl F (2009) OPEC as a political and economical entity. Eur J Polit Econ 25(4):399–408
Wurzel E, Willard L, Ollivaud P (2009) Recent oil price movements: forces and policy issues, OECD economics department working papers 737. Organisation for Economic Cooperation and Development, Paris
Author information
Authors and Affiliations
Corresponding author
Additional information
We are grateful for valuable comments to Marianne Haug, Enrico Marchetti, Paul Welfens and participants in the international conference on “The Global Financial Crisis and the Reform of the Financial Regulatory Framework”, School of Finance, Central University of Finance and Economics, and German Development Institute (DIE), May 7–8, 2009, in Beijing, the International Conference on India and China’s Role in International Trade and Finance and Global Economic Governance, ICRIER and IMF, December 6–7, 2007, Delhi, the 2010 Jeddah Economic Forum “The Global Economy 2020”, February 13–16, 2010, Jeddah/Saudi Arabia, and the European Economics and Finance Society (EEFS) Annual Conference, June 3–6, 2010, Athens, and the International Conference “Real and Financial Causes of the 2008 Crisis”, June 16–17, 2010, Rome.
Rights and permissions
About this article
Cite this article
Belke, A., Gros, D. A simple model of an oil based global savings glut—the “China factor”and the OPEC cartel. Int Econ Econ Policy 11, 413–430 (2014). https://doi.org/10.1007/s10368-013-0241-z
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10368-013-0241-z