Oil and the Macroeconomy in a Changing World

June 9, 2010

Since the mid 1970s, oil price spikes and busts have periodically disrupted the world economy. In July 2008 oil prices peaked above $145 a barrel; seven months later prices had plunged below $35. How could the same “fundamentals” account for both developments? Soaring oil prices in late 2007 and early 2008 were also blamed for driving both current and expected inflation higher, even though economists typically find that oil prices have had little effect on core inflation after the mid-1980s. In retrospect, some analysts also wonder whether this oil price surge aggravated the current global downturn. Clearly, understanding the interactions between energy prices, growth, and inflation has become a pressing issue for policymakers. Accordingly, we and other economic analysts are asking what we know – and what we need to know – about the determinants of oil prices and about the effect that oil prices have on the world economy.

To help answer such questions, the Federal Reserve Bank of Boston held an interactive symposium, Oil and the Macroeconomy in a Changing World, on June 9, 2010, in Boston. The symposium gathered oil-market experts, including practitioners from commodity and financial markets; industry analysts; and academic authorities on the science, technology, politics, and economics of oil and competing energy sources. These experts shared their views with economists and policymakers from the Federal Reserve System and other institutions, as well as academics and business leaders.

Conference Summary:
Oil and the Macroeconomy in a Changing World: A Conference Summary

 

Agenda

7:30-8:30 a.m.

Registration and Continental Breakfast

   
8:30 a.m. Welcoming Remarks
 

 

Eric S. Rosengren
President & Chief Executive Officer
Federal Reserve Bank of Boston

Remarks pdf
Presentation pdf

Conference Moderator:
Jeffrey C. Fuhrer
Executive Vice President and Director of Research
Federal Reserve Bank of Boston

   
8:45 a.m.

Explaining Oil Prices through History: Setting the Scene

The extraordinary oil price movements of the past three years are still a puzzle to most economists. This presentation will introduce the symposium by placing these movements in historical context. Do patterns from history provide a convincing explanation of recent prices movements? If not, what has changed?  What do economists really need to know to understand oil prices? What key factors do they tend to overlook?

  Presenter: David Hobbs offsite
Head of Research
IHS Cambridge Energy Research Associates
     
 

Discussant:

Eyal Dvir offsite
Assistant Professor
Boston College

Presentation pdf

   
9:45 a.m.

Break

   
10:00 a.m.

The Supply of Oil

This session will analyze world oil supply through 2030. It will examine a range of estimates for existing capacity and as well as likely timetables for the development of existing reserves. It will also assess the potential for new supplies arising from enhanced recovery methods, unconventional sources, and new discoveries. At what oil price would supplies from unconventional sources become viable? How would potential technical breakthroughs, infrastructure development and regulatory requirements affect the amount of oil coming on line? How does the location of recoverable reserves affect the market power of oil-producing nations and, thus, oil-supply estimates? Under what political and economic conditions do cartels thrive or collapse?

  Presenter:

Howard K. Gruenspecht offsite
Deputy Administrator
U.S. Energy Information Administration

Presentation pdf

     
 

Discussant:

John M. Deutch offsite
Institute Professor
Massachusetts Institute of Technology

   
11:00 a.m.

The Demand for Oil  

This session will document recent developments in the world’s demand for oil and assess a range of demand projections through 2030. Like the demand for all energy supplies, oil demand will be shaped by the pace and location of world growth, the speed of technological progress, and trends in energy efficiency. Governments will also affect oil demand through their decisions on infrastructure development and new regulations, including regulations involving carbon capture and/or sequestration. The session will examine differences in the oil demand of consumers and businesses, and investigate the price sensitivity of oil demand for these two groups at various time horizons.

  Presenter:

Steven Fries
Chief Economist
Shell International B.V.

Presentation pdf

     
 

Discussant:

Daniel Schrag offsite
Director, Harvard University Center for the Environment
Harvard University

   
12:00 p.m.

Lunch

   
12:30 p.m. Luncheon Remarks: The Future of Climate Change Policy
 

 


Robert N. Stavins offsite
Director, Harvard Environmental Economics Program
Harvard University

Presentation pdf

   
1:45 p.m.

Financial Innovation and Oil Markets

This session will review how financial market innovations have affected either the level or the variance of oil prices. Have oil-market investors become more heterogeneous in recent years? What price effects can be traced to new financial instruments or to changes in the institutional arrangements that govern oil markets? Has the increased importance of non-commercial traders altered the informational content of futures prices or the connections between the spot and futures markets?

  Presenter: Bart Chilton offsite
Commissioner
U.S. Commodity Futures Trading Commission
     
 

Discussant:

James Overdahl offsite
Vice President
NERA Economic Consulting

Presentation pdf

   
2:45 p.m.

Break

   
3:00 p.m.

Modeling Oil Prices

Applied researchers face a host of issues when building statistical models of oil prices. Some modelers treat oil as an asset that is influenced by shifts in speculative demand. Other models imply that the spot price of oil equilibrates the flow demand for oil with flow supply, with comparatively little attention paid to the role of inventories in smoothing consumption. How can these approaches be blended to provide accurate explanations of oil price movements? What do formal models imply about the price elasticity of oil demand – a crucial input into many other econometric models? How can models be used to evaluate the importance of “peak-oil” concerns and speculative activity during past oil-price increases?

  Presenter:

Lutz Kilian offsite
Professor of Economics
University of Michigan

Presentation pdf

     
 

Discussant:

Mark W. Watson offsite
Howard Harrison and Gabrielle Snyder Beck Professor of Economics and Public Affairs
Princeton University

Presentation pdf

   
4:00 p.m.

The Macroeconomic Effects of Oil-Price Shocks: An Empirical Assessment

This session will explore the macroeconomic impact of oil-price shocks, using both macro and micro evidence. How, for example, do oil-price shocks affect real consumption and investment? And how do the (highly salient) changes in oil prices affect inflation expectations, wage demands and core inflation? Are the impacts of oil-price increases and decreases symmetric? Does the size or the source of an oil shock (demand versus supply; foreign versus domestic; expected versus unexpected) matter? Has the impact of an oil-price shock changed over time, and does the recent volatility of oil prices matter? What evidence do we have that policymakers can distinguish between different sources of oil-price shocks and respond accordingly in real time? What theoretical and empirical advances in the study of oil and the macroeconomy would improve the conduct of monetary policy?

  Presenter:

James D. Hamilton offsite
Professor of Economics
University of California, San Diego

Presentation pdf

     

Discussant:

Ethan Harris offsite
Head of North America Economics
BofA Merrill Lynch Global Research

Presentation pdf

   
5:00 p.m.

Reception