1 Commodity price increases: causes, effects and policy responses G20 Conference on Commodity Price Volatility Istanbul, 13 th September 2011 Jonathan Coppel Economic Counsellor to the OECD Secretary-General

Overview Why high and volatile commodity prices are an issue? What have been recent trends in commodity prices? Driving forces of high prices and volatility What are the macroeconomic impacts of high commodity prices? Macroeconomic policy responses

Why be concerned by high commodity prices and volatility? Price level and movements inform production and consumption decisions But excessive volatility: – Is a source of uncertainty and risk – Impacts on rate of return, investment decisions and rate of growth – Economic stability and macroeconomic management – Food and energy security Key issue is whether commodity price volatility is excessive Commodity prices

Commodity price developments Oil price near record levels in nominal and real terms, in dollar terms and in other currencies. Some fall back in oil prices recently, but above historical average past 30 years. Current levels are consistent with a longer term trend observed since the start of the decade. Prices for other commodities exhibit a similar pattern. OECD/FAO outlook expects higher prices for most commodities. Commodity prices

5 All commodity prices are at or near recent historic peaks Source: OECD Main Economic Indicators; and Datastream. Commodity prices Index: Jan 2000 = 100; US$ per barrel

Factors explaining energy commodity price movements Emerging Market Economies Advanced Market Economies Demand side  High GDP growth  High energy intensity  Some capped retail prices  High income elasticity  Low GDP growth  Price elastic Supply side  Low supply response  Long lags between investment decision and production  Low long term interest rates  Shortage of qualified labour  Geopolitical risk  Low supply response  Long lags between investment decision and production  Low long term interest rates  Shortage of qualified labour  Geopolitical risk  Declining production in conventional fields Driving forces

Is commodity price volatility excessive? Statistical benchmarks depends on: – Time period chosen – The frequency of the data – The measure of volatility – Price data used The jury is still out Commodity price volatility

Source: OECD-FAO Agricultural Outlook Nominal Annualised Historic Volatility Commodity price volatility

Is commodity price volatility likely to increase? Upside factors Deregulation of energy and agricultural markets that expose producers and consumers to world prices Low stock levels Closer links between energy and food markets Production moving to less resilient areas and marginal sources Increased frequency of extreme events Downside factors New technology increasing resilience of crops and lowering marginal cost of energy extraction More open trade leading to less thin markets Better information flows Commodity price volatility

What are the macroeconomic impacts of commodity price increases? Direct impact on prices, which varies by region – e.g. $10 increase in oil adds 0.4% US, 0.1% Japan – Food price hikes have bigger effects in EMEs Higher core inflation Risk of adding to inflation expectations – Little sign of higher inflation expectations, though some metrics may be distorted Macroeconomic impacts

Energy and food prices and inflation Source: Bureau of Economic Analysis; Eurostat; OECD, Main Economic Indicators. Contribution to year-on-year inflation rates Macroeconomic impacts When oil price peaked in 2008 Q2, effect on inflation around 1.3 % points in US and Japan

What are the macroeconomic impacts of commodity price increases? Short term demand driven effects on output Size also varies by region, depending on intensity of use, wage behaviour and policy – e.g. $10 increase in oil reduces GDP by 0.3% in US and Japan and 0.2% in Europe Sustained higher prices lower potential output – $30 increase could lower GDP by 1% Volatility can also lower potential output Macroeconomic impacts

Impacts on global imbalances Source: OECD, Monthly Statistics of International Trade; and OECD calculations. Additional exports to oil producers per additional imports from oil producers, accumulated Macroeconomic impacts About 40% of the OECD area’s additional payments for oil imports return in the form of additional exports to the oil producers Most of the additional demand is within first year

Macroeconomic policy responses Monetary Policy Increase in global demand, drives a higher relative price, which MP should accommodate If persistent and impact on inflation expectations, MP should react Fiscal Policy When supply is fixed, demand must adapt via higher prices. Fiscal interventions are powerless at the global level For food, supply is more elastic, giving more scope to alleviate price hikes Humanitarian grounds are more compelling for food than energy Policy responses

15 Commodity price increases: causes, effects and policy responses G20 Conference on Commodity Price Volatility Istanbul, 13 th September 2011 Jonathan Coppel Economic Counsellor to the OECD Secretary-General