Vulnerability to Oil Price Increases

Transcription

1 Extractive Industries and Development Series #1 August 2008 Vulnerability to Oil Price Increases Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized A Decomposition Public Disclosure Authorized Analysis of 161 Countries Robert Bacon and Masami Kojima

2 The Oil, Gas, and Mining Policy Division series publishes reviews and analyses of sector experience from around the world as well as new findings from analytical work. It places particular emphasis on how the experience and knowledge gained relates to developing country policy makers, communities affected by extractive industries, extractive industry enterprises, and civil society organizations. We hope to see this series inform a wide range of interested parties on the opportunities as well as the risks presented by the sector. World Bank Group s Oil, Gas, and Mining Policy Division Oil, Gas, Mining, and Chemicals Department A joint service of the World Bank Group and the International Finance Corporation The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and should not be attributed in any manner to the World Bank or its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use.

3 Extractive Industries and Development Series #1 August 2008 Vulnerability to Oil Price Increases A Decomposition Analysis of 161 Countries Robert Bacon and Masami Kojima Extractive Industries for Development Series

4 COPYRIGHT (OR /oil OR /gas OR /mining) (OR /oil OR /gas OR /mining) Cover Photos: Oil rig, hematite-banded ironstone, LNG tanker.

5 TABLE OF CONTENTS v vi vii Foreword Acknowledgments Abbreviations Executive Summary Introduction Methodology Vulnerability and Why It Matters Components of Vulnerability to Oil Prices Decomposition of Changes in Vulnerability Data and Sources Results Trends in Contributing Factors Vulnerability Levels and Changes Results of the Decomposition Analysis Conclusions Appendix 1: Refined Laspeyres Index Decomposition Technique Appendix 2: Vulnerability Levels and Decomposition by Country References Extractive Industries for Development Series iii

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7 FOREWORD Between January 2002 and July 2008, world oil prices increased sevenfold. Because countries use oil across all sectors of their economies, rising oil prices have large effects. This study was undertaken as part of a broader program examining the impact of higher oil prices and the policy responses to oil price increases. It looks at the effects of changing oil prices and of net volumes of traded oil on countries vulnerability to rising oil prices defined here as the percentage of gross domestic product spent on importing oil in 161 countries between 1996 and For net oil importers, this percentage generally rose, increasing their vulnerability during the study period. By contrast, net oil exporters benefited from rising prices. Lower-middle-income countries were the most vulnerable to rising oil prices, followed by low-income countries. The study breaks vulnerability down into several contributing factors. Vulnerability is first split into production effects and consumption effects. For countries that do not produce oil, the production effects are zero. Consumption effects are always non-zero, because all countries consume oil. Consumption effects are then broken down to account for the effects of the higher oil prices, the changing share of oil in energy, the changing energy intensity of the economy, and the changing real exchange rate. Everything else being equal, the higher the share of oil in energy, the higher the energy intensity, and the lower the real exchange rate, then the higher the vulnerability to rising oil prices. The study finds that oil intensity (a product of the share of oil in energy and energy intensity) declined in more than 70 percent of the sample countries between 1996 and In 46 countries, however, oil intensity increased, exacerbating the impact of higher oil prices. In both 1996 and 2006, highincome countries that do not belong to the Organisation for Economic Co-operation and Development had the highest oil intensity, followed by lower-middle-income countries. Low-income countries had the lowest oil intensity in 1996, but countries of the Organisation for Economic Co-operation and Development reduced their oil intensity more than low-income countries and showed slightly lower oil intensity by The weakening dollar helped reduce vulnerability in 89 percent of the countries. Government policy instruments can, to varying degrees, influence import dependence, the share of oil in energy, the economy s energy intensity, and the exchange rate. Countries can reduce the share of oil in energy by diversifying away from oil, increasing the efficiency of oil use, and reducing net demand for oil-consuming activities. Similarly, countries can lower energy intensity by improving efficiency, managing demand, and moving the economy toward less energy-intensive sectors. Future work will examine what approaches have been effective in helping to mitigate countries rising vulnerability resulting from oil price increases and what policies have been successful with regard to implementing these measures. Somit Varma Director Oil, Gas, Mining, and Chemicals Department Extractive Industries for Development Series v

8 ACKNOWLEDGMENTS The authors wish to thank Ferdinand Vinuya for providing research assistance. The paper has also benefited from comments by Delfin Sa Go, Donald Laron, and Hassan Zaman, all of the World Bank. Alice Faintich of the Word Doctor edited the document, and Esther Petrilli-Massey of the World Bank oversaw the report production. vi VULNERABILITY TO OIL PRICE INCREASES

9 ABBREVIATIONS Btu EIA ESMAP GDP IEA OECD PPP WTI British thermal units Energy Information Administration Energy Sector Management Assistance Program gross domestic product International Energy Agency Organisation for Economic Co-operation and development purchasing power parity West Texas Intermediate Extractive Industries for Development Series vii

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11 EXECUTIVE SUMMARY This paper examines the levels of and changes in vulnerability to oil price increases between 1996 and 2006 in 161 countries for which data are available. Vulnerability defined here as the ratio of the value of net oil imports to gross domestic product (GDP) rises if oil consumption increases and oil production decreases per unit of GDP. By comparing the level of vulnerability of different economies at a point in time, those that are particularly vulnerable to oil price increases can be highlighted. This enables consideration of the factors (variables) that help determine the magnitude of vulnerability. Over time economies change in ways that may make them more vulnerable to oil price increases or less so, and the change in vulnerability will be related to changes in the underlying variables. The analysis this paper uses is a starting point for linking these factors. To gain an understanding of the relative contributions of different factors influencing vulnerability, the study uses a refined Laspeyres index to decompose the change in a country s vulnerability between any two years into the sum of the effects of changes in seven parameters, four related to oil consumption and three related to oil production. The consumption-related factors are the changes in the price of oil, the share of oil in total commercial energy consumption, the ratio of commercial energy consumed to GDP (referred to as energy intensity), and the proxy real exchange rate (the ratio of the nominal exchange rates in the two years divided by the ratio of local GDP price deflators). The production-related factors are the changes in the price of oil, the level of oil production, and the inverse of GDP. During the period under review, the oil share of energy declined only slightly on average, but energy intensity fell markedly in the 161 countries studied. As a result, the consumption of oil per unit of GDP declined. The proxy real exchange rate appreciated against the U.S. dollar in 81 percent of the countries. Vulnerability increased in nearly 80 percent of the countries, with several countries registering an increase of more than 10 percentage points of GDP. Most of the worst hit countries were not oil producers and had high oil vulnerability in The 15 large economies with the highest per capita GDP in 1996 saw only moderate changes in vulnerability, an increase of up to 2 percentage points of GDP. All 14 countries that had the lowest per capita GDP in 1996 experienced higher vulnerability in 2006, in 2 of the countries by more than 10 percentage points of GDP. As concerns the contribution of oil consumption to vulnerability, changes in the proxy real exchange rate helped offset the effects of higher Extractive Industries for Development Series 1

12 oil prices in nearly 90 percent of the countries, with an offset of more than 40 percent in 43 countries. Declining oil intensity also helped offset the price effect in 71 percent of the countries. In 10 percent of the countries, however, increasing oil intensity equaled 25 percent or more of the price effect. For oil producers, everything else being equal, higher oil prices decrease vulnerability arising from production. About a third of oil-producing countries experienced declines in oil production during A comparison of 12 countries with large reductions in output showed that the combined impact of lower output and higher GDP offset the oil price increase, resulting in a net increase in vulnerability related to production in 3 countries. The net effect of consumption was to increase vulnerability in every country, and aggregate vulnerability (the sum of production and consumption effects) increased in 8 of these 12 oil-producing countries. Of the 84 countries that produced oil in both 1996 and 2006, changes in oil intensity increased vulnerability in 19 percent of the countries, but among the 63 countries that did not produce oil in either year, changes in oil intensity increased vulnerability in 41 percent. Oil production helped lower vulnerability in 72 countries. In only five countries did both production and consumption effects help to lower vulnerability. The study also examined changes in vulnerability by subdividing the period under review into two subperiods, and The oil price increase during the first subperiod was small, and correspondingly the change in vulnerability was also limited. The change in vulnerability was greater during the second subperiod, which saw a 2.5-fold price increase in nominal U.S. dollars. More countries experienced large increases and more countries also experienced large decreases in vulnerability during the second subperiod than during the first. In relation to consumption effects, deteriorating proxy real exchange rates worsened vulnerability in many of the countries during the first subperiod, but the exchange rate effect offset the price increase in nearly all countries during the second subperiod. The offsetting impact of changing oil intensity was smaller during the second subperiod because the price effect was generally much larger. In most of the countries, a decrease in oil intensity helped offset the price effect. This study s use of a refined Laspeyres index rather than a log mean Divisia index enables the incorporation of both production and consumption effects, thereby allowing the inclusion of countries that are not net oil importers. This paper highlights the role of changes in the oil share of energy and of energy intensity, both of which can be influenced by government policies, and also by oil production, which, even though it is largely a function of geology, can also be affected by a country s upstream fiscal, contractual, and regulatory frameworks. The technique employed provides a rapid assessment of where governments might focus their policies to reduce countries vulnerability to oil price shocks. 2 VULNERABILITY TO OIL PRICE INCREASES

13 INTRODUCTION As figure 1 shows, crude oil prices were relatively stable through the 1990s, but then embarked on a steady and substantial increase. By 2006, the price of a basket of marker crudes (Brent, West Texas Intermediate [WTI], and Dubai Fateh) was triple what it had been in 1990, and by the first half of 2008 was almost five times the 1990 price. Such large price changes for a commodity that is extensively consumed in its refined forms can have large effects on economies. The rising cost of oil consumption pushes other prices, and therefore inflation, upward, while reductions in demand as a result of higher oil prices can lead to reduced macroeconomic demand and unemployment (for examples of the calculation of the macroeconomic impacts of higher oil prices on developing countries see Malik 2008 for Pakistan and Essama-Nssah and others 2007 for South Africa). For oil producers, an offsetting factor derived from oil production reduces net imports. Figure 1 Average Annual Price of a Basket of Crude Oils, US$ per barrel Source: World Bank Development Economics Prospects Group. Note: The 2008 average price is for the first six months of the year. Extractive Industries for Development Series 3

14 Net oil importers (considering both crude oil and oil products) experience an adverse shock when oil prices rise and thereby increase import bills, while net exporters experience a favorable shock. The magnitudes of these shocks vary widely, and there has been interest in quantifying the impact of oil price changes on different economies. Economists have measured economies vulnerability to oil shocks in a number of ways. This study uses a simple measure that has the advantage of allowing changes in vulnerability over time to be broken down into different components. This permits us to highlight the major factors determining levels of and changes in vulnerability. At the same time, this breakdown of vulnerability into its constituent components allows us to examine an individual country s performance to examine whether it is out of line with that of other similar countries and, if so, what aspects of its oil use might be subject to policy interventions that could reduce its vulnerability. The decomposition analysis used here is an extension of methods widely used to analyze greenhouse gas emissions. It has the novel and essential feature of separating the effects of oil price changes on the value of oil production and the costs of oil consumption. 4 VULNERABILITY TO OIL PRICE INCREASES

15 METHODOLOGY Various approaches to measuring vulnerability and decomposing it into contributing terms have been proposed and examined. VULNERABILITY AND WHY IT MATTERS Several recent studies have examined energy security for a number of countries. Energy security is usually broadly defined, encompassing not only the impact of higher prices of oil and other fuels, but also supply diversification between fuels and between countries supplying the same fuels. Such studies have been carried out by the Asia Pacific Energy Research Centre (2007) and the United Nations Development Programme (2007) for countries in the Asia and Pacific region, by the Energy Sector Management Assistance Program (ESMAP) for low income countries (ESMAP 2005a) and for Sub-Saharan African countries (ESMAP 2005b), by Forfás (2006) for Ireland, by Gupta (2008) for a group consisting mainly of industrial countries, by the World Bank (2005) for Ukraine, and by the World Energy Council (2008) for European countries. All these studies have in common the idea that high import dependence on oil increases an economy s vulnerability to oil price shocks. They differ in how to measure this and in whether a measure of oil import dependence should be combined with other indexes to generate a multidimensional index of energy security. The indexes that are combined with the value of oil imports, which indicates the extent to which a price change will provide a shock to the economy, are primarily of two types. The first group includes indexes that help explain the size of the import bill, such as the difference in levels of domestic oil production and consumption or the extent of energy use in the economy. The second group includes indexes that relate to the economy s ability to absorb a shock, such as the amount of foreign exchange reserves or the size of the budget surplus. The schemes used to combine these indexes are not usually based on any formal criteria for determining their relative weightings, and indeed, may involve some double counting, for example, the degree of energy intensity is a determinant of the oil import bill for a given country. The most commonly used measure of the vulnerability of an economy to changes in the international price of oil is the ratio of the value of net imports of crude oil and oil products to the value of gross domestic product Extractive Industries for Development Series 5

16 (GDP). Both can be measured in U.S. dollars (the currency in which crude oil prices are quoted) or in local currency. The African Development Bank Group (2006), the International Energy Agency (2004), and the World Bank (2005) provide rationales for the use of this measure. When global oil prices change, economies may be affected by means of three separate routes. The first route is direct effects on the terms of trade. The change in the terms of trade occurs as a result of the increase in the price of imports relative to the price of exports. In the simplest case, the economy of an oil-importing country that does not have excess foreign reserves and cannot access additional external financing will have to deflate and GDP will fall. The magnitude of the fall is moderated by the price elasticity of demand for oil. As consumers substitute away from oil, the volume of imports is reduced, thereby offsetting some of the adverse effects of the increased prices. In this case the change in GDP is given by the following formula: %ΔGDP = %ΔP (1 E) (NI/GDP), (1) where %ΔGDP = percentage change in GDP, %ΔP = percentage change in the price of oil imports, E = price elasticity of demand for oil, NI/GDP = value of net imports of oil as a share of GDP. Thus the magnitude of the impact of a given percentage change in the price of oil on the economy is proportional to the share of the value of net oil imports in GDP and is negatively related to the price elasticity of demand for oil. Where the short-run price elasticity of demand is low, as appears to be the case from the limited evidence available, the impact is close to the measure of vulnerability used in this study. The long-run price elasticity of demand is greater than the short-run price elasticity, thus if the price remains at the new higher level over a period of a few years, demand is reduced further relative to where it would have been in the absence of the price increase. Where countries have access to additional financing through their exchange reserves or through borrowing, the initial impact on GDP through deflation will be lower. However, a country will be unable to finance a persistent price change indefinitely unless it runs a persistent surplus on its balance of payments. In practice, the impact of an oil price rise on GDP may be partly or totally offset by a simultaneous increase in the price of export commodities, for example, minerals, or may be reinforced by an increase in the prices of other imported commodities, for instance, foodstuffs. The measure given by equation (1) is the change in GDP relative to what would have happened in the absence of the oil price rise. 6 VULNERABILITY TO OIL PRICE INCREASES

17 For net oil exporters, an oil price rise is equivalent to an increase in GDP, as the increase in the value of production is greater than the increase in the cost of consuming oil. Absent changes in levels of production and consumption, a price increase will reduce vulnerability. Again, the greater the price elasticity of demand, the smaller the increase in consumption with rising GDP assuming that price increases are passed through to consumers and the greater the overall benefit from the oil price increase. A rising oil price may also encourage an increase in oil production, leading to an improvement in the net import position. Except in those few countries with significant spare capacity, short-run elasticities of supply are likely to be low. The second route is indirect effects from real wage, price, and structural rigidities within the economy. Higher oil prices drive up input costs, reduce non-oil demand, and lower investment. For net oil importers, tax revenues can fall and budget deficits can increase. To control inflationary pressures, governments might restrict the money supply, thereby driving up interest rates. The pressure of price increases can lead to wage increases, and these in turn can lead to unemployment. The magnitude and timing of such effects depends on the structure of the economy and the nature of the government s policy response. The third route is a global effect through the impact on world output. The rise in oil prices has tended to reduce global demand from oil-importing countries by more than it has increased demand from exporting countries, leading to a general reduction in world GDP below where it would have been in the absence of the price shock. This is felt as a reduction in the demand for exports by all countries, whether oil importing or exporting. The total effect of a sustained change in the oil price level on an economy is therefore manifested through a number of different channels and changes over time as economies adjust to their new situation. The index of vulnerability used in this study provides a simple way to calculate the maximum direct effect of an oil price increase on the terms of trade. By comparing the level of vulnerability of different economies at a point in time, those that are particularly vulnerable to oil price increases can be highlighted. One can then consider the factors that help determine the magnitude of vulnerability. Economies change over time in ways that may make them more vulnerable to oil price increases or less so, and the change in vulnerability will be related to changes in these underlying variables. The decomposition analysis introduced in this paper is a starting point for linking these factors together. Extractive Industries for Development Series 7

18 COMPONENTS OF VULNERABILITY TO OIL PRICES The level of vulnerability can be linked to a number of relevant components by a Kaya (1990) type of identity. ESMAP (2005a) proposed the following identity: net oil imports/gdp (net oil imports/total oil use) (total oil use/ total energy use) (total energy use/gdp). (2) This identity, in which net oil imports are measured in volume terms and GDP is measured in current U.S. dollars, highlights the three major factors that directly contribute to the magnitude of oil imports. When a country must import all the oil it uses, its vulnerability will be higher. Similarly, provided that net oil imports are positive, if oil is the major source of commercial energy in an economy, then this also tends to increase its vulnerability. 1 Finally, when the ratio of energy used to the level of GDP is high, again vulnerability will tend to be high. This study, and another ESMAP (2005b) study that used the value of net oil imports, describe the distribution of the three factors across countries. The latter study also computed vulnerability and the levels of the three factors in 1990 and 2003, but did not link changes in vulnerability to changes in the three factors in any accounting sense, and thus did not calculate their relative importance in explaining changes in vulnerability. For countries that were net oil importers throughout the period of analysis, Bacon and Kojima (2008) use an extension of the approach described to highlight some additional factors that affect the vulnerability indicator. As equation (3) shows, they measured vulnerability (V) by the ratio of the value of net oil imports to the level of GDP, both in current US dollars: 2 V = (NIV$/GDPC$) (P$) (NI/OC) (OC/EC) (EC/GDPRL) (GDPRL/GDPCL) (a) (b) (c) (d) (e) (GDPCL/GDPC$), (f) (3) where NIV$ = net import value in dollars, that is, volume of net imports of oil and oil products per year in barrels times annual crude price in current U.S. dollars, GDPC$ = value of GDP in current U.S. dollars, 1 In this study, energy refers to commercially traded energy and does not include freely collected or homegrown biomass such as firewood, dung, and agricultural residues. 2 For consistency with previous studies of vulnerability, this study treats net oil imports as positive and net oil exports as negative. 8 VULNERABILITY TO OIL PRICE INCREASES

19 P$ = price of oil in current U.S. dollars, NI = volume of net oil and oil products imports in barrels per year, OC = volume of consumption of oil products in barrels per year, EC = total primary energy consumption in quadrillion British thermal units per year, GDPRL = value of GDP in constant local currency, GDPCL = value of GDP in current local currency. The various terms in parentheses correspond to (a) the price of oil, (b) the share of imported oil in total oil consumption, (c) the share of oil in total energy, (d) the energy intensity relative to real GDP, (e) the inverse of the GDP price deflator, and (f) the exchange rate. The energy intensity term is measured relative to GDP in real terms so that, when the values at two different points in time are compared, this ratio is not affected by movements in domestic prices, but only by changes in real output, which could be expected to be linked to the use of energy. This step necessitates the introduction of two more terms to balance the identity, one linking GDP in real local currency to GDP in current local currency and the second converting this to U.S. dollars. The product of the last two terms, (e) (f), is proportional to the real exchange rate. This study generalizes equation (3) in two ways. First, to be able to compare the various components of vulnerability across countries, energy intensity cannot be measured in real local currency, but has to be measured in real U.S. dollars so that all values are in equivalent units. Because energy intensity is important for understanding differences between countries, the study measures this term by the ratio of energy consumed to real GDP in dollars converted at purchasing power parity (PPP) rather than at market exchange rates, using recently released valuations based on 2005 data. The value at PPP better reflects the general level of economic development, and hence is more relevant in a ratio pertaining to the total use of energy in an economy. 3 The use of GDP data expressed in constant U.S. dollars also necessitates introducing an additional term: the ratio of GDP in real U.S. dollars to GDP in real local currency (the real GDP converter). This ratio is constant over time, but allows equation (3) to retain the last two terms, which play an important role in explaining changes in vulnerability. The second generalization is designed to accommodate those countries that are net importers throughout the period, those that are net exporters throughout the period, and those that switch from one state to the other during the period. Increases in oil prices have two effects on an economy: a favorable 3 Valuing GDP in dollars at market exchange rates does not necessarily reflect the relative purchasing powers of two economies, because exchange rates are determined only by the export and import of traded goods and ignore the production of nontraded goods. In addition, capital asset transactions and interest rate policies, neither of which reflects the real production of the economy, can also affect exchange rates. Extractive Industries for Development Series 9

20 effect related to the extent that a country produces oil and an adverse effect related to the extent that it consumes oil. Where relative changes in levels of production and consumption result in a switch from a country being a net exporter to a net importer, being able to separate the two effects is useful. To this end, the identity is written as shown in equation (4) as the sum of two terms that separate the production and consumption of oil and oil products: V = (NIV$/GDPC$) [P$ (OC/EC) (EC/GDPR$) (GDPR$/GDPRL) (GDPRL/GDPCL) (GDPCL/GDPC$)] [(P$) (OP) / (GDPC$)], (4) where OP = volume of domestic production of crude oil per year, GDPR$ = GDP measured in U.S. dollars at 2005 PPP values. The identity is based on estimating the cost of imports (or the value of exports) from data on physical production and consumption. Relating vulnerability to each term, the impact of variations in any one term while all others are held constant can be identified. For example, if the share of oil in energy increases while overall energy intensity remains constant, vulnerability will worsen. DECOMPOSITION OF CHANGES IN VULNERABILITY The level of vulnerability and the magnitude of the important components of vulnerability can indicate how countries might reduce their vulnerability to oil price shocks. In addition, changes in vulnerability over time can provide insights into the evolution of vulnerability and reveal whether countries are following development paths that are amplifying the impact of oil price shocks. To relate changes in vulnerability to changes in the different components of the equation (4), some form of index number technique must be used. Investigators have used different indexes for similar purposes (see Ang 2004 for a review of these indexes). The logarithmic mean Divisia index has been widely used for studies decomposing changes in carbon emissions into various components, but this method presents difficulties when the sign of the variable to be explained changes, as can be the case for vulnerability when a country shifts from being a net exporter to a net importer. In this case, Chung and Rhee (2001) propose the use of a mean rate of change index instead, while Ang and Liu (2007) use an extension of the logarithmic mean Divisia index approach. Neither of these methods is suitable for decomposing the sum (or difference) of two terms, each of which is the product of several factors, as in this study. 10 VULNERABILITY TO OIL PRICE INCREASES

21 A refined Laspeyres index, as Sun (1998) proposes and Lise (2006) uses, provides a suitable approach to decomposition is this case. Appendix 1 presents an explanation of this method of decomposition. Using this approach, the change in vulnerability between two dates can be decomposed into as many effects as there are terms in equation (5): change in vulnerability = consumption effects production effects = (oil price effect through consumption + oil share in energy effect + energy intensity effect + real GDP converter effect + GDP price deflator effect + exchange rate effect) (oil price effect through output + oil production effect + inverse of current GDP in US$ effect). (5) The interpretation of each of the effects can be illustrated by the first term, the oil price effect through consumption. This effect measures the impact on the change in the ratio of net oil imports to GDP brought about by the change in value of oil consumption. This is calculated as the sum of two components. The first component calculates the effect of changed prices on the base physical consumption level, while the second component calculates the effect of changed prices on a share of the change in the volume of consumption brought about by changes in all the other factors in the price component. The method of decomposition used ensures that the sum of the effects is equal to the total change in vulnerability. The real GDP converter effect is always zero, because the ratio of GDP in real dollars (at PPP) to GDP in real local currency remains constant throughout the period, and hence does not contribute to changes in vulnerability. The combination of these last two terms is the proxy real exchange rate effect. The measure of vulnerability used does not show the distributional or fiscal (through taxes and subsidies) effects of a change in oil prices. To analyze the effects on poor households, as opposed to poor countries, much more data would be required, including patterns of fuel use and prices charged to consumers. DATA AND SOURCES Because one purpose of this study is to provide a comparative analysis of countries vulnerability to oil price changes, using data constructed on a consistent basis is important. For many countries, no published data on the value of oil production, consumption, or trade are available, and these have to be constructed using published data on volumes of production and consumption and international prices. Extractive Industries for Development Series 11

22 The period studied is also somewhat constrained by data availability. Prior to the mid-1990s, data for oil volumes are less complete than for later years, thus 1996 was chosen as a representative starting point for the analysis. By 1996, oil prices had been fairly stable for several years, and so economies were not adjusting to major price shocks. At the time of writing, the most recent date for which a comprehensive set of oil and GDP data was available was 2006, and an 11-year period is long enough to reveal the effects of any significant changes in factors other than oil prices. An 11-year time frame is also long enough to permit disaggregation into two subperiods to highlight important changes in decomposition during the period. PRICES The price of oil used for this study is the annual average for a basket of three internationally traded crude oils: WTI, Brent, and Dubai Fateh. All production and consumption volumes are multiplied by these prices to obtain estimates of values and, by computing the difference between the values of consumption and production, the value of net exports or imports. The use of a common crude price for all countries introduces some inaccuracies into the estimates of vulnerability. First, countries import and export crudes other than these three markers, and depending on the qualities of the crudes and the market demand for these qualities, various crudes are sold at discounts or premiums to these markers (see Bacon and Tordo 2005 for an explanation). Second, many countries import (or export) oil products rather than crude, and with the exception of fuel oil, the international prices of oil products are greater than those of crude oil. Third, the international prices used in the study exclude the costs of transport to importing countries. For countries that rely largely on imports of refined products, vulnerability is understated, especially for markets with high transport costs such as small island economies and landlocked countries. Finally, some countries have special import deals with oil producers. For these countries, international oil prices may overstate what they actually pay. VOLUME OF OIL PRODUCTION AND CONSUMPTION The Energy Information Administration (EIA) of the U.S. Department of Energy and the International Energy Agency (IEA) provide the widest coverage of oil production and consumption by country. The EIA provides data on 186 countries and the IEA provides data on 133 countries. At the time of writing, EIA data on oil volumes covered the period until 2006, while the IEA covered the period until Both sources include data for members of the Organisation for Economic Co-operation and 12 VULNERABILITY TO OIL PRICE INCREASES

23 Development (OECD) for one further year. Because of its wider coverage and more recent data, the EIA is preferred as the main source of information on oil volumes; however, comparison of the two sources for 2005 reveals a few major inconsistencies. Where a third data source that matched the IEA rather than the EIA data could be identified, then the study used the IEA data if the figures from the EIA were not confirmed. Production data are for crude oil, natural gas liquids, other liquids, and refinery processing gains (or losses), while consumption data are for petroleum products. The difference between these two series is set equal to the sum of net exports (imports) of crude plus products. For a few countries that do not produce crude oil or natural gas liquids, total production is negative because of refinery losses. QUANTITY OF ENERGY CONSUMED The EIA provides data on countries total energy consumption, measured in quadrillion British thermal units (Btu), for the same 186 countries as for oil volumes, but at the time of writing, these data were available only until The study arrived at estimates for 2006 by making linear extrapolations from the data for 2004 and GROSS DOMESTIC PRODUCT The various series for GDP are taken from the World Bank s (2008b) database. The values for real GDP in local currency do not use the same base year for all countries, but as the base year for any given country is the same for both the 1996 and 2006 data, this introduces no complications for the vulnerability analysis. The data on real GDP in U.S. dollars measured at PPP are based on recently released estimates using 2005 valuations (World Bank 2008b). For the 186 countries for which the EIA provides oil and energy data, complete GDP data are lacking in some cases, thus the final sample covers 161 countries. The countries for which full sets of GDP data are not available are a number of small island nations and a number of large oil producers, including Bahrain, Iraq, Kuwait, Libya, Oman, Qatar, and the United Arab Emirates. Extractive Industries for Development Series 13

24 14 VULNERABILITY TO OIL PRICE INCREASES

25 RESULTS This section describes trends in contributing factors, followed by the results. Countries are grouped according to their characteristics by oil import status, by income in describing the results. TRENDS IN CONTRIBUTING FACTORS Changes in vulnerability are linked to changes in the different factors included in equations (4) and (5). Before bringing these together in the decomposition analysis, a brief review of the main trends in each of the factors follows. In every case the units in which a factor is measured are the same across countries to permit comparisons. PRICES Table 1 presents data on crude and product prices for selected years during the period covered by the analysis (starting year, ending year, and midpoint) and for Data for petroleum products are for the U.S. Gulf Coast. The price of the U.S. marker crude WTI at Cushing, Oklahoma, is given for reference. The table confirms the following points relevant to the decomposition analysis: Table 1 Annual Average Prices of Oil Products and Crude, Selected Years Fuel Gasoline (US$/gallon) Heating oil (US$/gallon) Low sulfur diesel (US$/gallon) Jet kerosene (US$/gallon) Residual fuel oil (US$/gallon) Crude basket (US$/gallon) Crude basket (US$/barrel) WTI (US$/barrel) Sources: EIA 2008c; World Bank Development Economics Prospects Group. Extractive Industries for Development Series 15

26 Crude prices increased strongly in the period covered by the analysis. The major increase occurred during the second half of the period. Product prices, with the exception of residual fuel oil, which is used in industry and to generate electricity, were substantially higher than crude prices. For countries whose imports consisted mainly of products other than residual fuel oil, the prices used in this study will understate their level of vulnerability. Gasoline, heating oil, and residual fuel oil prices rose less in percentage terms between 1996 and 2006 than crude oil prices, residual fuel oil prices markedly less. Jet kerosene prices rose at the same rate and diesel oil prices rose at a slightly higher rate. Prices of crude oil and of products increased by approximately 10 percent between 2006 and The price of WTI for the first five months of 2008 was US$106 a barrel, representing a further increase of 47 percent over the 2007 price, and was about 61 percent higher than that for OIL PRODUCTION, OIL CONSUMPTION, AND IMPORT DEPENDENCE Together with GDP, levels of oil production and consumption are key determinants of vulnerability. They respond to somewhat different factors and can have dissimilar trajectories over time, leading to a variety of paths of import dependence among different countries. Oil production is constrained by a country s basic resource endowment. The amount of recoverable oil depends not only on geology, but also on oil prices and the costs of extraction. As emphasized in discussions on peak oil, the total amount of oil that can be extracted at a given cost is limited. In addition, the lowest-cost oil has probably already been discovered and is in the process of being extracted; therefore future discoveries are likely to be concentrated in higher-cost fields, for example, in ultra-deep water and tar sands. However, the rise in oil prices tends to make the extraction of oil from higher-cost fields attractive, thereby adding to long-term supply. Offsetting this tendency has been a sharp increase in the costs of extraction (which may not be permanent), as the costs of drilling equipment and other items rise because of a supply shortage. In 1996, some 89 countries in the sample were oil producers, and by 2006 the number had increased to 93. Some countries with reserves that were extractable at relatively low cost are already seeing production declines. The United Kingdom and the United States which had open access to fields and no shortage of capital to develop them fall into this category. Some 36 countries in the sample experienced declining oil production during the period under review. 16 VULNERABILITY TO OIL PRICE INCREASES

27 Other countries have commenced production recently and are still experiencing sharply increasing levels of output, for example, Angola and Equatorial Guinea. Their later start also reflects both political and economic constraints to earlier development. A third group of countries, mainly some members of the Organization of Petroleum Exporting Countries, has followed a policy of maintaining a fairly steady level of output over many years rather than attempting to maximize short-run production. The extremely large size of their reserves relative to the size of individual economies in this group has made this approach feasible. A controlled level of production has still been adequate to permit strong development of these economies. Even when the production of oil increases, this can be at a lower rate than an increase in GDP, so unless the price of oil rises sufficiently rapidly, the ratio of the value of oil production to GDP could fall over time. China has seen the volume of oil production increase only slowly over the past decade, at a much lower rate than increases in its GDP, and only the strong increase in oil prices ensured that the ratio of the value of oil production to GDP did not fall during In addition, the rapid increase in domestic consumption has exacerbated the challenge resulting from slow production growth. According to Brown s (2007) export-land model, if consumption increases by more than domestic production, the export surplus of oil can fall rapidly, and even turn into net import dependence. Falling domestic production increases the chance of this happening. Indonesia and the United Kingdom are examples of countries that were net oil exporters in 1996 but had become net importers by SHARE OF OIL IN ENERGY USE A number of factors determine the amount of oil an economy consumes, of which the level of GDP is the most important. The ratio of oil consumed to GDP is a measure of an economy s oil intensity and can be analyzed as the product of two terms used in the decomposition: the ratio of oil used to total energy used and the ratio of energy used to GDP. The share of oil in energy use reflects both the economy s stage of economic development and the availability of choices among fuels that permit substitution between fuels. Table 2 Global Use of Petroleum Products by Sector, 2005 (quadrillion Btu) Item Electricity generation Buildings Industrial Transportation Total Consumption Source: EIA 2008a. Extractive Industries for Development Series 17

28 A number of different sectors within an economy consume petroleum products. In most economies, the transportation sector is dominant in relation to oil use, but the industrial sector, especially industries producing chemicals and petrochemicals, is also important. Household use for heating and cooking is small, but is relatively more important in low-income countries. The power sector also uses petroleum products, and in a few limited cases even crude oil, for electricity generation. Table 2 presents a global sectoral breakdown of the use of petroleum products. The share of oil in energy use depends on the sectoral composition of demand, the energy intensity of the sectors, and the substitutability between fuels within sectors. Over time the sectoral composition of GDP can change, and this will affect the total oil share. The power sector has the most opportunities for substitution between fuels, and higher oil prices can lead governments to follow a deliberate policy of fuel diversification to gas, coal, or hydro or to other forms of renewable energy such as geothermal. In addition to relative prices, the differing degrees of price volatility may also lead governments to prefer fuels they consider to be less volatile in relation to price. A further factor will be a government s desire to give some preference to domestically produced fuels. A drive for self-sufficiency can be part of a risk reduction strategy when governments believe that domestic production is less susceptible to supply shocks than imported fuel sources. The buildings sector, which includes households, commercial establishments, and public buildings, consumes kerosene and liquefied petroleum gas, particularly in developing countries for cooking, heating, and, where there is no electricity, lighting. Where grid electricity supply is unreliable or unavailable, diesel may be used for small-scale electricity generation. In the residential sector, substitution by electricity (and natural gas where available) takes place as household incomes rise (or as natural gas becomes available), while substitution by solid fuels (wood, charcoal, dung, coal) takes place as incomes drop or as the prices of petroleum products rise. In industrial uses of petroleum products, some limited opportunities for fuel substitution with natural gas are available, but the extent to which fuel switching can occur depends on the coverage of the gas pipeline infrastructure and, to varying degrees, the availability of domestic sources of gas. In the transportation sector during , gasoline and diesel had no effective substitute fuel. The share of compressed natural gas, liquefied petroleum gas, and liquid biofuels was extremely small. The use of petroleum products in this sector therefore depended on the size and composition of the vehicle fleet and on the uses made of the vehicles. 18 VULNERABILITY TO OIL PRICE INCREASES

29 Figure 2 shows the percentage share of oil in total energy use in the sample countries in 1996 and It shows that oil was the dominant source of commercial energy in many of the countries. One quarter of the countries relied on oil for more than 80 percent of their energy use. Between 1996 and 2006, the overall dependence on oil as a source of commercial energy fell only slightly: the unweighted average share of oil declined from 58 percent to 56 percent. Figure 2 Number of Countries by Share of Oil in Total Energy Use, 1996 and Number of countries Percentage share of oil in total energy use Sources: EIA 2008b; authors calculations. An analysis of the correlation between the share of oil in energy use and the level of per capita GDP (measured in constant U.S. dollars at PPP) revealed only a weak relationship (figure 3). The unsquared correlation was in 1996 and in These numbers suggest that the differences between countries in the share of oil in total energy use are not primarily determined by the level of economic development as measured by per capita GDP. ENERGY INTENSITY The total amount of energy an economy uses depends strongly on the level of GDP, and also on the sector structure. An economy with a large industrial sector will tend to use more energy than an economy of similar size with a large agriculture or service sector. To make comparisons over time, the study measures GDP in constant price terms to factor out nominal price changes and focus on real GDP changes. Extractive Industries for Development Series 19

30 Figure 3 Oil Share in Energy and Per Capita GDP, 2006 Oil share of energy (percent) ,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 Per capita GDP in 2005 US$ at PPP Sources: EIA 2008b; World Bank 2008b; authors calculations. To provide meaningful comparisons among countries, using a measure of GDP in a common currency is informative. This involves the choice of valuation of GDP in this common currency. Data are available for conversion to U.S. dollars at market exchange rates and at PPP. This study relates energy use to the level of real GDP in U.S. dollars valued at PPP to better reflect the real production of the different economies. Table 3 shows the number of countries whose energy intensity fell in different ranges in 1996 and The table indicates the presence of a wide range of energy intensities in both 1996 and 2006, but several of the Table 3 Number of Countries by Energy Intensity, 1996 and 2006 Btu per US$ of GDP a Less than 2, ,000 to less than 4, ,000 to less than 6, ,000 to less than 8, ,000 to less than 10, ,000 to less than 15, ,000 to less than 20, ,000 or greater 12 5 Sources: EIA 2008b; World Bank 2008b; authors calculations. a. GDP in 2005 U.S. dollars at PPP. 20 VULNERABILITY TO OIL PRICE INCREASES

31 countries with the highest values had seen these reduced by The unweighted mean energy intensity fell from 8,200 Btu per U.S. dollar to 6,600 Btu per U.S. dollar, indicating that for some countries their economies had shifted to a less energy-intensive position. Where the share of oil in energy use remained constant, the oil intensity would have been reduced. A key issue in looking ahead for many countries is whether a natural tendency exists for energy intensity to change with changes in the level of development, in particular, whether energy intensity tends to increase with GDP at low levels of GDP per capita and then to stabilize, or even fall, as GDP per capita reaches the levels found in high-income economies. If economies tend to have similar patterns of sectoral development, with industry becoming increasingly important initially, followed by services taking over as the dominant growth sector, then a nonlinear relationship between energy intensity and GDP per capita might be found. A further complication could come from variations in energy efficiency. If high-income economies are the most efficient in their use of energy because of more up-to-date plants and better energy management practices, then this would tend to result in a negative relationship between energy intensity and GDP per capita. The unsquared correlation between energy intensity and real per capita GDP was in 1996 and 0.07 in Figure 4 shows the plot between the variables for Clearly no simple relationship exists between energy intensity and the level of economic development expressed in per capita Figure 4 Energy Intensity and Per Capita GDP, 2006 Btu/GDP in 2005 US$ at PPP 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, ,000 40,000 60,000 80,000 Per capita GDP in 2005 US$ at PPP Sources: EIA 2008b; World Bank 2008b; authors calculations Extractive Industries for Development Series 21

32 GDP measured at PPP. A number of other important factors must be involved in explaining the differences in energy intensity among countries. The product of the share of oil in energy use and the energy intensity is the economy s oil intensity and it depends on the factors that influence these two ratios. Figure 5 shows the number of countries in different ranges of oil intensity in 1996 and in Figure 5 Number of Countries by Oil Intensity, 1996 and Number of countries ,200 1,500-1,200-1,500 Barrels of oil/gdp in millions of 2005 US$ at PPP Figure 6 plots oil intensity as a function of per capita income. Economies are divided according to 2007 gross national income per capita, calculated using the World Bank Atlas method. The sample countries are divided as follows: low-income countries, US$935 or less; lower-middle-income countries, US$936 US$3,705; upper-middle-income countries, US$3,706 US$11,455; and high-income countries, US$11,456 or more (World Bank 2008a). As the figure shows, low-income countries and high-income OECD countries had compa Sources: EIA 2008b; World Bank 2008b; authors calculations. Oil intensity varied considerably between countries, but a reduction is clearly apparent between 1996, when the unweighted mean value was 690 barrels per million dollars, and 2006, when the unweighted mean value was 587 barrels per million dollars. The unsquared correlations between oil intensity and per capita GDP were low, in 1996 and in VULNERABILITY TO OIL PRICE INCREASES

33 Figure 6 Oil Intensity by Per Capita Income, 1996 and 2006 Barrels of oil/gdp in millions of 2005 US$ at PPP 1, Low income countries Lowermiddle income countries Uppermiddle income countries Highincome non-oecd countries Highincome OECD countries Sources: EIA 2008b; World Bank 2008b; authors calculations rable oil intensities in In both years, high-income OECD countries had the highest oil intensity, followed by lower-middle-income countries. REAL GDP CONVERTER The ratio of real GDP in U.S. dollars at PPP to real GDP in local currency is a constant over time, but does vary between countries. Accordingly, it makes no contribution to changes in vulnerability over time for any given country and is not shown in the decomposition analysis. GDP PRICE DEFLATOR The ratio of GDP in real local currency to GDP in current local currency is the inverse of the GDP price deflator. This decreases as domestic prices increase, and hence tends to reduce oil vulnerability. If no offsetting movement of the exchange rate occurs, a larger value of GDP in current terms would translate into a larger GDP in dollars, and hence as a reduction in the ratio of oil imports to GDP. The GDP price deflator is a measure of the price level in the economy, and the ratio of its value in 2006 to that in 1996 indicates the extent to which the general domestic price level increased over that period. Table 4 shows the number of countries falling in different ranges for this price ratio. It indicates a wide dispersion of price ratios, with 39 percent of countries Extractive Industries for Development Series 23

34 Table 4 Number of Countries by Price Ratio (GDP deflator) Price level in 2006 relative to price level in 1996 Number of countries Less than to less than to less than to less than to less than or greater 16 Sources: World Bank 2008b; authors calculations. experiencing a price increase of less than 50 percent, while 23 percent experienced a price increase of more than 150 percent. EXCHANGE RATE The ratio of GDP in current local currency to GDP in current U.S. dollars is the exchange rate expressed as units of local currency per dollar. When this ratio falls, the local currency appreciates against the dollar. Absent other offsetting changes in the decomposition effects, the economy s oil vulnerability falls if its currency appreciates: local GDP is worth more in dollars, which reduces the relative size of the oil import bill in relation to GDP in dollars. Movements in a country s exchange rate depend on a number of local and global factors. The general state of its balance of payments, its foreign reserves, and its interest rate policy can all affect the exchange rate. At the same time, the strength or weakness of the U.S. economy affects exchanges rates against the dollar. Because a considerable volume of oil trade is between countries other than the United States, when the dollar depreciates, as has been the case in recent months, the dollar price of oil rises somewhat to compensate for the fall in the value of the currency. If the vulnerability analysis were conducted in terms of the ratio of the value of oil imports in local currency to GDP in local currency, then an appreciation of the exchange rate would have an equivalent effect on reducing vulnerability by lowering the price of oil (traded in U.S. dollars) expressed in local currency terms. Changes in the exchange rate over time are one component of the change in vulnerability according to the identity used for the decomposition. Table 5 shows the number of countries falling in different ranges for the ratio of 24 VULNERABILITY TO OIL PRICE INCREASES

35 the exchange rate in 2006 to that in The table shows that most currencies experienced a nominal depreciation against the dollar during the period considered, some by large factors. In the absence of any domestic price change, this would lead to rising vulnerability. Table 5 Number of Countries by Exchange Rate Ratio (local currency per dollar) Ratio of the nominal exchange rate in 2006 to 1996 Number of countries Less than to less than to less than to less than to less than or greater 15 Sources: World Bank 2008b; authors calculations The product of the inverse GDP deflator and the exchange rate is related to the real exchange rate in local currency per unit of foreign currency through the following equation: RER = NER P d / P f, (6) where RER = real exchange rate, NER = nominal exchange rate expressed as units of local currency per unit of foreign currency, P d = domestic price level, P f = foreign price level. Movements in the real exchange rate depend on changes in both price levels, domestic and foreign. The product of the inverse GDP deflator and the exchange rate term would need to be multiplied by the price level of the foreign country (here in U.S. dollars) to obtain the real exchange rate. Because the exchange rates of all the sample countries are expressed against the U.S. dollar, the relative magnitude of the product of the nominal exchange rate and the inverse of the domestic price level for different countries is identical to the relative magnitude of the real exchange rates, and changes in the product of these two terms will also be proportional to changes in the real exchange rates. The change in the U.S. domestic price level does not directly affect a country s vulnerability with respect to the Extractive Industries for Development Series 25

36 oil import bill, and so is omitted from equation (4). In the decomposition, the ratio of the exchange rate to the GDP deflator serves as a proxy for the real exchange rate. If this ratio increases, the country suffers a real exchange rate depreciation against the dollar, and its vulnerability would increase in the absence of any offsetting effects related to oil consumption. 4 The ratio of the proxy real exchange rate in 2006 to that in 1996 can be calculated as the ratio of the nominal average exchange rates in the two years divided by the ratio of the local GDP price deflators. Multiplying this ratio by the ratio of the U.S. GDP price deflators (1.24) at the two dates yields the actual ratio of the real exchange rates between the two years. Table 6 shows the number of countries falling in different ranges for the ratio of the proxy real exchange rate in 2006 to that in Table 6 Number of Countries by Proxy Real Exchange Rate Ratio Ratio of the value of the exchange rate (local currency per U.S. dollar) divided by the GDP deflator in 2006 relative to its value in 1996 Number of countries Less than to less than to less than or greater 30 Sources: World Bank 2008b; authors calculations. In terms of the proxy real exchange rate, the currencies of 81 percent of the countries in the sample appreciated against the dollar, 5 and these countries would have experienced a decrease in vulnerability in the absence of changes in other factors considered in the decomposition. VULNERABILITY LEVELS AND CHANGES Table 7 indicates the number of sample countries that experienced vulnerability in different ranges in 1996 and A positive value for the range indicates that the country was a net oil importer, while a negative value indicates that it was a net oil exporter. Table A2.1 in appendix 2 shows the levels of vulnerability for all 161 countries in 1996 and The real exchange rate used here is that against the U.S. dollar to balance out equation (4). It does not capture a country s competitiveness against its trading partners, for which a trade-weighted exchange rate would be required. 5 In terms of the real exchange rate, allowing for movements in U.S. domestic prices, the currencies of half the countries in the sample appreciated against the dollar. 26 VULNERABILITY TO OIL PRICE INCREASES

37 Table 7 Vulnerability Levels, 1996 and 2006 Value of net oil imports/gdp (percent) Number of countries in 1996 Percentage of total in 1996 Number of countries in 2006 Percentage of total in or higher to less than to less than to less than to less than to less than to less than to less than Below Sources: EIA 2008b; World Bank 2008b; authors calculations. In 1996, only 12 percent of the countries in the sample had a level of vulnerability whereby net oil imports accounted for more than 5 percent of GDP, but by 2006, some 39 percent of the sample countries fell into this category, and 12 percent had net oil imports that accounted for more than 10 percent of GDP. These figures indicate the extent to which vulnerability increased during the period. They also indicate the potential impact on these economies if oil prices continue to stay at the levels of the first half of An increase of 50 percent in the oil price would be equivalent to a further rise of 5 percent in vulnerability for the latter group of countries most at risk unless it were strongly moderated by offsetting changes in some of the other factors included in the decomposition. Figure 7 plots vulnerability by countries income category for 1996, 2001, and During those years, lower-middle-income countries consistently had the highest vulnerability. Low-income countries had the second highest vulnerability in all three years. For net oil-exporting countries, the change in oil prices reduced their vulnerability. Some of these countries experienced extremely large increases in the ratio of net exports of oil to GDP. Table 8 shows the distribution of changes in vulnerability between 1996 and It indicates a considerable worsening of vulnerability, with 43 percent of countries experiencing an increase in vulnerability of more than 2.5 percentage points of GDP and 22 percent experiencing an increase of more than 5 percentage points. Of the net oil exporters, 15 countries experienced a reduction of more than 7.5 percentage points of GDP. Given that several Extractive Industries for Development Series 27

38 Figure 7 Countries Vulnerability by Income, 1996, 2001, and 2006 Vallue of net oil imports/gdp (percent) Low income countries Lowermiddle income countries Uppermiddle income countries Highincome non-oecd countries Highincome OECD countries Sources: EIA 2008b; World Bank 2008b; authors calculations. Table 8 Changes in Vulnerability between 1996 and 2006 Percentage point increase in vulnerability Number of countries Percentage of total 7.5 or greater to less than to less than to less than to less than to less than to less than Below Sources: EIA 2008b; World Bank 2008b; authors calculations. significant oil producers had to be excluded from the study because of a lack of data, the actual number would be considerably greater. Another way of presenting the change in vulnerability is to consider the ratio of vulnerability in 2006 to that in For net oil-importing countries, in the absence of increases in nominal GDP, of improvements in the share of oil in energy and in energy intensity, and of improvements in the real exchange rate, this ratio would be equal to at least 3.15, the ratio of oil prices in the two years. 28 VULNERABILITY TO OIL PRICE INCREASES

39 Any country with a vulnerability ratio greater than 3.15 experienced factors that increased its vulnerability for reasons other than the oil price change itself. This is the case for 29 countries, of which 9 are small island economies. RESULTS OF THE DECOMPOSITION ANALYSIS The variable that is the subject of the decomposition analysis is the change in vulnerability of a country between 1996 and As vulnerability is the percentage of GDP accounted for by net oil imports, changes in vulnerability are changes in the shares of GDP accounted for by oil imports, where GDP itself changes between the two dates. In particular, vulnerability refers to a change in percentage points and not a percentage change. Each factor in the decomposition accounts for a change in the percentage share of net oil imports in GDP. Appendix table A2.2 provides the complete set of decomposition results. The following sections highlight certain subgroups of interest. COUNTRIES WITH THE MOST ADVERSE MOVEMENTS IN VULNERABILITY Table 9 shows the results for 14 countries that experienced the largest increases in vulnerability. This group of countries omits Djibouti, for which the accuracy of the consumption data is uncertain, and Singapore, whose exports are unusually oil intensive. A positive value in a cell of the table indicates that the factor contributed to a worsening of vulnerability. For these 14 countries, the worsening of vulnerability ranged from 6.9 percent of GDP in the Syrian Arab Republic to 20.2 percent of GDP in Guyana. Most of these countries produced no or very little oil, so that the production effects, the last three terms in equation (4), are zero. Syria and Uzbekistan saw declines in oil production that partly offset the benefits of rising oil prices on the total value of production. In addition, GDP in U.S. dollars rose in these two countries, reducing the value of production relative to GDP. The impact of higher oil prices via consumption in the 14 countries was large because the value of their oil consumption was high relative to their GDP. In several of the countries the large share of oil in GDP was exacerbated by an increase in the share of oil in energy use, whereas three countries experienced a falling oil share. In Jordan and Tajikistan, a substantial drop in energy intensity mitigated the large price effect of consumption, but several countries experienced an increase in energy intensity. In Togo, for example, the increase in energy intensity was equivalent to a rise in the share of oil imports of 6.9 percentage points. This was in addition to an increase in the share of oil in energy use, which contributed another 2.5 percentage points. In all cases except for Maldives, the impact of the real exchange rate reduced vulnerability, and Extractive Industries for Development Series 29

40 Table 9 Decomposition Analysis of the Countries with the Largest Increases in Vulnerability between 1996 and 2006 (change in the percentage of GDP) Country Production effects Consumption effects Change in vulnerability Real Price Output GDP Total Price Oil share Energy intensity exchange rate Total Guyana Togo Tajikistan Seychelles Guinea- Bissau Jamaica Maldives Sierra Leone Nicaragua Jordan Uzbekistan Honduras Belize Syrian Arab Republic Sources: EIA 2008b; World Bank 2008b; authors calculations. in Tajikistan and Uzbekistan, this was a major factor moderating the adverse effect of the oil price rise on consumption. HIGH-INCOME COUNTRIES Table 10 presents the decomposition of the change in vulnerability for 15 highly developed economies. The results are shown in descending order of per capita GDP (in 2005 U.S. dollars at PPP) in The table omits three small economies: Brunei Darussalam, Luxembourg, and Singapore. With the exception of Norway, Denmark, and Canada, the high-income countries experienced a small increase in vulnerability during the period. Only in the Netherlands did vulnerability worsen by more than 2 percent of GDP. Seven countries were oil producers, but in Norway, the United 30 VULNERABILITY TO OIL PRICE INCREASES

41 Table 10 Decomposition Analysis of Countries with the Largest Per Capita GDP in 1996 (change in the percentage of GDP) Country Production effects Consumption effects Change in vulnerability Real Price Output GDP Total Price Oil share Energy intensity exchange rate Total Norway United States Switzerland Austria Netherlands Denmark Japan Canada Australia Germany Belgium Iceland France Italy United Kingdom Sources: EIA 2008b; World Bank 2008b; authors calculations. States, the Netherlands, Australia, and the United Kingdom, the level of oil production declined during the period, thereby partially offsetting the favorable effects of higher prices on production. Only in Norway, Denmark, and Canada did production account for a large share of GDP, but elsewhere the price effects on production were generally small. The strong growth in GDP in Norway and Canada reduced the relative importance of oil production to GDP, and thus markedly worsened their vulnerability. In most of the countries the impact of higher oil prices via consumption was relatively small because of the low level of oil use in the economy relative to GDP. The share of oil in energy use increased vulnerability in just four of the countries and energy intensity increased vulnerability in only two of the countries. In every country except for the Netherlands, the combination of these two factors decreased vulnerability. A further reduction came from the real exchange rate effect, which was negative in 13 of the countries. As a result of Extractive Industries for Development Series 31

42 these factors, in most of the countries the worsening effect of the oil price rise on the value of consumption was substantially reduced. LOW-INCOME COUNTRIES Table 11 looks at the 14 lowest-income countries (measured by per capita GDP in 2005 U.S. dollars at PPP) in The countries are listed in descending order of their per capita GDP. None of the countries was an oil producer, so that all effects on vulnerability resulted from changes in the value of oil consumption relative to GDP. The level of vulnerability worsened by more than 5 percent of GDP in four countries and increased by less than 2 percent of GDP in three countries. The price effect was large in most of the countries because of the large size of oil consumption relative to GDP in the base year. This effect was extremely large in Liberia, indicating that the increase in the cost of imported oil relative to GDP in Table 11 Decomposition Analysis of Countries with the Lowest Per Capita GDP in 1996 (change in the percentage of GDP) Country Production effects Consumption effects Change in vulnerability Real Price Output GDP Total Price Oil share Energy intensity exchange rate Total Togo Mali Tanzania Malawi Central African Republic Guinea- Bissau Uganda Niger Rwanda Sierra Leone Ethiopia Mozambique Burundi Liberia Sources: EIA 2008b; World Bank 2008b; authors calculations. 32 VULNERABILITY TO OIL PRICE INCREASES

43 1996 had been exceptionally high. This effect was offset in large part by the substantial reduction in energy intensity. The reduction in energy intensity resulted from the large increment in the level of real GDP relative to the increase in the quantity of energy used. The share of oil in energy use fell in only three of the countries and energy intensity fell in six countries. The combination of these two effects produced a fall in oil intensity in nine of the countries. Appreciation of the real exchange rate also contributed to a reduction in vulnerability in 11 of the countries. Despite the favorable movements in oil intensity and the real exchange rate, vulnerability worsened in every case, largely because of the importance of the base year share of oil to GDP, that is, the price effect tended to dominate. A comparison with the analysis of high-income countries shows that the principal reason low-income countries experienced larger increases in vulnerability was their high initial consumption of oil relative to GDP, coupled with the fact that none of the low-income countries were oil producers. COUNTRIES WITH DECLINING OIL PRODUCTION About one-third of the oil-producing countries experienced declines in output during the period, and for some, this decline was large enough relative to GDP to result in significant worsening of their vulnerability. If the initial level of production was large relative to GDP, the increase in price during the period under review would have contributed significantly to reducing vulnerability and could have more than offset the impact of the decline in output. Table 12 presents decomposition results for those countries where the production decline worsened vulnerability by at least 1 percent of GDP, with countries arranged in order of their output. For all 12 countries, the increase in the dollar value of their GDP led to an increase in vulnerability as the relative size of oil production to GDP declined. For Syria, the United Kingdom, and Benin, the ratio of the total value of oil production to GDP declined over the period, and for two other countries (the República Bolivariana de Venezuela and Indonesia) the reduction in vulnerability resulting from production was less than 2 percent of GDP. When these weak production effects are combined with the consumption effects, eight of these oil producers experienced an overall increase in vulnerability during the period. This worsening of vulnerability took place despite a reduction in vulnerability derived from the real exchange rate effect in all the countries; from energy intensity in Syria and the United Kingdom; and from the share of oil in energy use in Syria, the Arab Republic of Egypt, and Indonesia. Extractive Industries for Development Series 33

44 Table 12 Decomposition Analysis of Countries with Large Production Declines (change in the percentage of GDP) Country Production effects Consumption effects Change in vulnerability Real Price Output GDP Total Price Oil share Energy intensity exchange rate Total Gabon Papua New Guinea Syrian Arab Republic Uzbekistan Venezuela, R. B. de Egypt, Arab Rep. of Norway Indonesia Cameroon Colombia United Kingdom Benin Source: Authors calculations. OFFSETTING BY THE REAL EXCHANGE RATE The foregoing results indicate that movements in the proxy real exchange rate reduced the level of vulnerability in 81 percent of the sample countries. The relative importance of this offsetting factor can be measured by calculating the ratio of the component of the decomposition attributed to changes in the real exchange rate to the component attributed to the effect of the price change. Table 13 shows the number of countries for which the ratio fell in different ranges. The table indicates that not only did most countries experience an appreciation of the proxy real exchange rate against the dollar, but that this was sufficiently large to offset a substantial proportion of the impact of higher oil prices on the value of oil consumption. The unweighted mean offsetting ratio for the proxy real exchange rate was 28 percent. Only 17 countries experienced negative 34 VULNERABILITY TO OIL PRICE INCREASES

45 Table 13 Offsetting Effect of the Real Exchange Rate between 1996 and 2006 Ratio of the real exchange rate effect to the price effect through consumption a Number of countries offsetting, in which the depreciation of the proxy real exchange rate actually augmented the effect of the oil price rise on vulnerability. OFFSETTING BY THE OIL INTENSITY EFFECT Percentage of total 0.6 or greater to less than to less than to less than to less than Source: Authors calculations. a. The negative of the ratio of the two terms is taken to give the offsetting percentage. Decreases in the oil share of energy or decreases in energy intensity, both of which may be affected by policies to reduce their levels, can offset the impact of higher oil prices via consumption. As noted earlier, the product of the two terms is the oil intensity, and its contribution to offsetting the impact of the price rise can be measured by the ratio of the sum of the components for these two terms to the component for the impact of prices through consumption. Table 14 shows the number of countries for which this ratio fell in different ranges. The oil intensity effect moderated the price effect through consumption less than the proxy real exchange rate effect. The unweighted mean offsetting was 13 percent, and 46 countries experienced negative offsetting whereby oil intensity rose during the period, thereby increasing vulnerability. Table 14 Offsetting Effect of Oil Intensity between 1996 and 2006 Ratio of the sum of the oil share effect and the energy intensity effect to the price effect through consumption a Number of countries Percentage of total 0.5 or greater to less than to less than to less than Below Source: Authors calculations. a. The negative of the ratio of the two terms is taken to give the offsetting percentage. Extractive Industries for Development Series 35

46 OIL PRODUCERS Of the 84 countries that were oil producers in both 1996 and 2006, the oil intensity effect increased vulnerability in 16 of the countries (or 19 percent of the oil producers) during the study period. Of the 63 countries that did not produce oil in both1996 and 2006, the oil intensity effect increased vulnerability in 26 countries (or 41 percent of the nonproducers). Compounding this unfavorable trend in oil intensity effects, among the nonproducers only Latvia had total consumption effects that is, the sum of the four terms related to consumption that reduced vulnerability, compared with six oil-producing countries. In an overwhelming majority of the oil producers (72 countries), the total production effects reduced their vulnerability. However, only five countries Azerbaijan, Bulgaria, Equatorial Guinea, Kazakhstan, and Lithuania managed to lower their vulnerability through both production and consumption effects. VULNERABILITY AND OFFSETTING IN TWO SUBPERIODS As figure 1 showed, oil prices increased slightly between 1996 and 2001 and much more between 2001 and A decomposition of the changes in vulnerability for the two subperiods and was carried out and the detailed results are shown in appendix tables A2.3 and A2.4. Table 15 shows the number of countries in which changes in vulnerability fell in different ranges in the two subperiods. The table reveals that many more countries experienced a greater increase in vulnerability in the second subperiod than in the first. At the same time, Table 15 Changes in Vulnerability, and Percentage point increase in vulnerability Number of countries Percentage of total Number of countries Percentage of total or greater to less than to less than to less than to less than to less than to less than Below Source: Authors calculations. 36 VULNERABILITY TO OIL PRICE INCREASES

47 a number of oil producers saw a greater reduction in vulnerability during the second subperiod. Further insights into these changes can be obtained by examining the offsetting effects of the real exchange rate and of oil intensity in the two subperiods. Tables 16 and 17 show the number of countries where the Table 16 Offsetting Effect of the Real Exchange Rate, and Ratio of the real exchange rate effect to the price effect through consumption a Number of countries Percentage of total Number of countries Percentage of total or greater to less than to less than to less than to less than to less than Below Source: Authors calculations. a. The negative of the ratio of the two terms is taken to give the offsetting percentage. Table 17 Offsetting Effect of Oil Intensity, and Ratio of the sum of the oil share effect and the energy intensity effect to the price effect through consumption a Number of countries Percentage of total Number of countries Percentage of total or greater to less than to less than to less than to less than to less than Below Source: Authors calculations. a. The negative of the ratio of the two terms is taken to give the offsetting percentage. Extractive Industries for Development Series 37

48 offsetting coefficients fell in different ranges. In the first subperiod, 70 percent of countries experienced negative offsetting by the real exchange rate, that is, the proxy real exchange rate suffered depreciation against the U.S. dollar, reduced the value of GDP expressed in dollars, and increased vulnerability. By contrast, virtually every country experienced appreciation of the proxy real exchange rate in the second subperiod, thereby helping to offset the impact of higher oil prices on the level of vulnerability. The unweighted mean offsetting ratio for the real exchange rate increased from in to in A reduction in oil intensity offset some of the rise in oil prices in more countries in the second subperiod than in the first. However, the unweighted mean offsetting ratio dropped from 0.35 to 0.09, indicating that the price increase in the second subperiod compared with the first far outweighed the reduction in the share of oil in energy use. 38 VULNERABILITY TO OIL PRICE INCREASES

49 CONCLUSIONS Countries vulnerability to the price of oil, as measured by the ratio of the value of net oil imports to GDP, is unevenly distributed, with a substantial number of countries having experienced high levels of vulnerability by The large change in oil prices during also increased this inequality markedly: by 2006, in some 40 percent of sample countries, net oil imports accounted for more than 5 percent of GDP, while 20 percent of the countries had net oil exports that accounted for more than 10 percent of GDP. The further increase in oil prices during 2007, and especially in the first half of 2008, will likely have increased the level of vulnerability further for those countries already most at risk. For the lowest per capita income countries, none benefited from domestic oil production that could offset the impacts of higher oil prices, and the percentage increase in vulnerability was substantially greater than that experienced by the group of high-income countries, several of which are oil producers. Changes in vulnerability were related not only to changes in the price of oil, but also to changes in a number of other factors. On the production side, analysis of a group of 12 countries where oil production underwent a significant decline demonstrated the importance of maintaining or increasing domestic oil production. Of these countries, eight experienced an overall increase in vulnerability and four experienced an increase in vulnerability of more than 4 percent of GDP. Policies to enhance or commence oil production have the potential to considerably reduce oil price vulnerability. Surprisingly, oil producers were more likely to conserve oil than non-oil producers, as measured by the effect of changes in the oil intensity of the economy on vulnerability. The total consumption effect reduced vulnerability in seven oil-producing countries, but only one non-oil-producing country. In six of the seven oil producing countries, both consumption and production effects reduced vulnerability. Changes in several factors moderated or amplified the impact of oil prices on vulnerability. The impact of the direct price change was largest for those economies where the share of oil consumption was initially greatest. The factors affecting this share examined are the ratio of oil to energy use as a whole, the ratio of energy use to GDP (valued at constant U.S. dollars at PPP), and the proxy real exchange rate. Extractive Industries for Development Series 39

50 The share of oil in energy was high for the sample countries as a whole and remained almost constant over the period: 25 percent of the countries in the sample relied on oil for at least 80 percent of their commercial energy use. Although some countries were able to offset some of the adverse effects of higher oil prices by reducing their share of oil in energy, the findings of this study point to the importance of policy for focusing on ways to reduce the share of oil in energy use, including by fuel diversification where this is economically viable. The ratio of energy use to GDP declined overall, but much of this was concentrated in a few countries whose ratio was extremely high at the beginning of the period. A number of countries demonstrated the contribution made by a reduction in energy intensity, and this requires further analysis. If the change is largely due to shifts in sector structure as economies develop, then less room is available for policies to reduce oil price vulnerability. However, if further analysis reveals that gains have been made by improving energy efficiency, then such findings offer valuable lessons for other countries seeking to reduce their vulnerability to continued high oil prices. Combining these two effects into an oil intensity effect produced the finding that during the period, 46 countries experienced negative offsetting whereby the oil intensity of GDP worsened, thereby leading to increased pressure on vulnerability. For these countries, examining the reasons for this tendency is important along with seeking policies that might be able to reverse it. The movement of the real exchange rate (as measured by the proxy used in this study) tended to augment the effect of the increase in oil prices in on vulnerability, but played an important role in offsetting the price increase in This effect is likely to have continued between 2006 and 2008 with the global fall in the U.S. dollar, but whether the effect will have been strong enough to offset the whole of the large oil price rise experienced during the period is doubtful. Given the much higher levels of vulnerability experienced in 2006 than previously and the almost certain further increases experienced in the last two years, seeking policies to reduce oil consumption has become increasingly important. Experience does not provide evidence of a widescale reduction in the use of oil as GDP increases as a general feature of the process of economic development. At the same time, there is a risk that oil prices will undergo further substantial increases, underscoring the need for seeking ways to minimize nonessential use of oil, maximizing the efficiency of oil use, and diversifying away from oil. 40 VULNERABILITY TO OIL PRICE INCREASES

51 PREFACE APPENDIXES Extractive Industries for Development Series 41

52 42 VULNERABILITY TO OIL PRICE INCREASES

53 APPENDIX 1: REFINED LASPEYRES INDEX DECOMPOSITION TECHNIQUE The following simplified example illustrates the principles used to construct a refined Laspeyres index decomposition. Some variable X in the base period is related to the difference of two terms, each of which is expressible as the product of two factors, giving rise to four effects: X A B E F. (A1) In the end period the identity becomes (X + ΔX) (A + ΔA) (B + ΔB) (E + ΔE) (F + ΔF), (A2) where ΔX indicates the change in the value of variable X. The change in X between two periods is given by ΔX (A ΔB + B ΔA + ΔA ΔB) (E ΔF + F ΔE + ΔE ΔF). (A3) The final step in the decomposition is to assign each of the six terms in equation (A3) to one of the four effects. The first term expresses the impact of the change in factor B evaluated at the base level of A, while the second term express the impact of the change in factor A evaluated at the base level of factor B. As the third term expresses the impact of the change in factor A evaluated by the change in factor B, it encapsulates effects of changes in both factors. Sun s (1998) proposal is to assign this on the principle of jointly created and equally distributed, so that half of the third term is assigned to the impact of the change in A and the other half to the impact of the change in B. The total effect of the change in A is then given by (B ΔA + ΔB ΔA 2). The three other effects are calculated in a similar fashion. A similar approach is followed when there are products of more than two factors. For example, a three-factor single-term expression, X A B C, (A4) gives Extractive Industries for Development Series 43

54 (X + ΔX) (A + ΔA) (B + ΔB) (C+ ΔC ). (A5) The term in the change in A, using the jointly created and equally distributed principle, becomes ΔA (BC + C ΔB 2 + B ΔC 2 + ΔB ΔC 3). (A6) Lise (2006) provides the complete formula for a decomposition of four factors. Wherever a term involves the product of more than one change, its effects are shared equally between all the effects related to those changes. 44 VULNERABILITY TO OIL PRICE INCREASES

55 APPENDIX 2: VULNERABILITY LEVELS AND DECOMPOSITION BY COUNTRY Table A2.1 Sample Countries Levels of Vulnerability, 1996, 2001, and 2006 (percentage of GDP) Country Country Albania Bulgaria Algeria Burkina Faso Angola Burundi Antigua and Barbuda Cambodia a Argentina Cameroon Armenia Canada Australia Cape Verde Austria Central African Republic Azerbaijan Chad Bangladesh Chile Belarus China Belgium Colombia Belize Comoros Benin Congo, Rep. of Bhutan Costa Rica Bolivia Côte d Ivoire Bosnia and Herzegovina Croatia Botswana Cyprus Brazil Czech Republic Brunei Darussalam Denmark Extractive Industries for Development Series 45

56 Table A2.1 Sample Countries Levels of Vulnerability, 1996, 2001, and 2006 (percentage of GDP), continued Country Country Djibouti India Dominica Indonesia Dominican Republic Iran, Islamic Rep. of Ecuador Ireland Egypt, Arab Rep. of Israel El Salvador Italy Equatorial Guinea Jamaica Eritrea Japan Estonia Jordan Ethiopia Kazakhstan Fiji Kenya Finland Kiribati France Korea, Rep. of Gabon Kyrgyz Republic Gambia, The Lao PDR Georgia Latvia Germany Lebanon Ghana Lesotho Greece Liberia Grenada Lithuania Guatemala Luxembourg Guinea Macedonia, FYR Guinea- Bissau Madagascar Guyana Malawi Haiti Malaysia Honduras Maldives Hungary Mali Iceland Malta VULNERABILITY TO OIL PRICE INCREASES

57 Table A2.1 Sample Countries Levels of Vulnerability, 1996, 2001, and 2006 (percentage of GDP), continued Country Country Mauritania Samoa Mauritius Saudi Arabia Mexico Senegal Moldova Seychelles Mongolia Sierra Leone Morocco Singapore Mozambique Slovakia Namibia Slovenia Nepal Solomon Islands Netherlands South Africa New Zealand Spain Nicaragua Sri Lanka Niger Sudan Nigeria Suriname Norway Swaziland Pakistan Sweden Panama Switzerland Papua New Guinea Syrian Arab Republic Paraguay Tajikistan Peru Tanzania Philippines Thailand Poland Togo Portugal Tonga Romania Trinidad and Tobago Russian Federation Tunisia Rwanda Turkey Saint Kitts and Nevis Uganda Saint Lucia Ukraine Extractive Industries for Development Series 47

58 Table A2.1 Sample Countries Levels of Vulnerability, 1996, 2001, and 2006 (percentage of GDP), continued Country Country United Kingdom Venezuela, R. B. de United States Vietnam Uruguay Yemen, Rep. of Uzbekistan Zambia Vanuatu Sources: EIA 2008b; World Bank 2008b; authors calculations. a. Data for Cambodia are taken from the International Energy Agency, because Energy Information Administration data differ substantially and do not agree with direct country-based information. Data are for VULNERABILITY TO OIL PRICE INCREASES

59 Table A2.2 Decomposition of Changes in Vulnerability, (change in the percentage of GDP) Country Production effects Consumption effects Change in vulnerability Real Price Output GDP Total Price Oil Share Energy Intensity exchange rate Total Albania Algeria Angola Antigua and Barbuda Argentina Armenia Australia Austria Azerbaijan Bangladesh Belarus Belgium Belize Benin Bhutan Bolivia Bosnia & Herzegovina Botswana Brazil Brunei Darussalam Bulgaria Burkina Faso Burundi Cambodia a Cameroon Canada Cape Verde Central African Republic Extractive Industries for Development Series 49

60 Table A2.2 Decomposition of Changes in Vulnerability, (change in the percentage of GDP), continued Country Production effects Consumption effects Change in vulnerability Real Price Output GDP Total Price Oil Share Energy Intensity exchange rate Total Chad Chile China Colombia Comoros Congo, Rep. of Costa Rica Côte d Ivoire Croatia Cyprus Czech Republic Denmark Djibouti Dominica Dominican Republic Ecuador Egypt, Arab Rep. of El Salvador Equatorial Guinea Eritrea Estonia Ethiopia Fiji Finland France Gabon VULNERABILITY TO OIL PRICE INCREASES

61 Table A2.2 Decomposition of Changes in Vulnerability, (change in the percentage of GDP), continued Country Production effects Consumption effects Change in vulnerability Real Price Output GDP Total Price Oil Share Energy Intensity exchange rate Total Gambia, The Georgia Germany Ghana Greece Grenada Guatemala Guinea Guinea-Bissau Guyana Haiti Honduras Hungary Iceland India Indonesia Iran, Islamic Rep. of Ireland Israel Italy Jamaica Japan Jordan Kazakhstan Kenya Kiribati Korea, Rep. of Kyrgyz Republic Extractive Industries for Development Series 51

62 Table A2.2 Decomposition of Changes in Vulnerability, (change in the percentage of GDP), continued Country Production effects Consumption effects Change in vulnerability Real Price Output GDP Total Price Oil Share Energy Intensity exchange rate Total Lao PDR Latvia Lebanon Lesotho Liberia Lithuania Luxembourg Macedonia, FYR Madagascar Malawi Malaysia Maldives Mali Malta Mauritania Mauritius Mexico Moldova Mongolia Morocco Mozambique Namibia Nepal Netherlands New Zealand Nicaragua Niger Nigeria VULNERABILITY TO OIL PRICE INCREASES

63 Table A2.2 Decomposition of Changes in Vulnerability, (change in the percentage of GDP), continued Country Production effects Consumption effects Change in vulnerability Real Price Output GDP Total Price Oil Share Energy Intensity exchange rate Total Norway Pakistan Panama Papua New Guinea Paraguay Peru Philippines Poland Portugal Romania Russian Federation Rwanda Saint Kitts and Nevis Saint Lucia Samoa Saudi Arabia Senegal Seychelles Sierra Leone Singapore Slovakia Slovenia Solomon Islands South Africa Spain Sri Lanka Extractive Industries for Development Series 53

64 Table A2.2 Decomposition of Changes in Vulnerability, (change in the percentage of GDP), continued Country Production effects Consumption effects Change in vulnerability Real Price Output GDP Total Price Oil Share Energy Intensity exchange rate Total Sudan Suriname Swaziland Sweden Switzerland Syrian Arab Republic Tajikistan Tanzania Thailand Togo Tonga Trinidad and Tobago Tunisia Turkey Uganda Ukraine United Kingdom United States Uruguay Uzbekistan Vanuatu Venezuela, R. B. de Vietnam Yemen, Rep. of Zambia Sources: EIA 2008b; World Bank 2008b; authors calculations. a. Data for Cambodia are taken from the International Energy Agency, because Energy Information Administration data differ substantially and do not agree with direct country-based information. Data are for VULNERABILITY TO OIL PRICE INCREASES

65 Table A2.3 Decomposition of Changes in Vulnerability, (change in the percentage of GDP) Country Production effects Consumption effects Change in vulnerability Real Price Output GDP Total Price Oil Share Energy Intensity exchange rate Total Albania Algeria Angola Antigua and Barbuda Argentina Armenia Australia Austria Azerbaijan Bangladesh Belarus Belgium Belize Benin Bhutan Bolivia Bosnia & Herzegovina Botswana Brazil Brunei Darussalam Bulgaria Burkina Faso Burundi Cambodia a Cameroon Canada Cape Verde Extractive Industries for Development Series 55

66 Table A2.3 Decomposition of Changes in Vulnerability, (change in the percentage of GDP), continued Country Production effects Consumption effects Price Output GDP Total Price Oil Share Energy Intensity Real exchange rate Total Change in vulnerability Central African Republic Chad Chile China Colombia Comoros Congo, Rep. of Costa Rica Côte d Ivoire Croatia Cyprus Czech Republic Denmark Djibouti Dominica Dominican Republic Ecuador Egypt, Arab Rep. of El Salvador Equatorial Guinea Eritrea Estonia Ethiopia Fiji Finland VULNERABILITY TO OIL PRICE INCREASES

67 Table A2.3 Decomposition of Changes in Vulnerability, (change in the percentage of GDP), continued Country Production effects Consumption effects Change in vulnerability Real Country Price Output GDP Total Price Oil Share Energy Intensity exchange rate Total France Gabon Gambia, The Georgia Germany Ghana Greece Grenada Guatemala Guinea Guinea-Bissau Guyana Haiti Honduras Hungary Iceland India Indonesia Iran, Islamic Rep. of Ireland Israel Italy Jamaica Japan Jordan Kazakhstan Kenya Kiribati Korea, Rep. of Extractive Industries for Development Series 57

68 Table A2.3 Decomposition of Changes in Vulnerability, (change in the percentage of GDP), continued Country Production effects Consumption effects Price Output GDP Total Price Oil Share Energy Intensity Real exchange rate Total Change in vulnerability Kyrgyz Republic Lao PDR Latvia Lebanon Lesotho Liberia Lithuania Luxembourg Macedonia, FYR Madagascar Malawi Malaysia Maldives Mali Malta Mauritania Mauritius Mexico Moldova Mongolia Morocco Mozambique Namibia Nepal Netherlands New Zealand Nicaragua Niger VULNERABILITY TO OIL PRICE INCREASES

69 Table A2.3 Decomposition of Changes in Vulnerability, (change in the percentage of GDP), continued Country Production effects Consumption effects Change in vulnerability Real Price Output GDP Total Price Oil Share Energy Intensity exchange rate Total Nigeria Norway Pakistan Panama Papua New Guinea Paraguay Peru Philippines Poland Portugal Romania Russian Federation Rwanda Saint Kitts and Nevis Saint Lucia Samoa Saudi Arabia Senegal Seychelles Sierra Leone Singapore Slovakia Slovenia Solomon Islands South Africa Spain Sri Lanka Extractive Industries for Development Series 59

70 Table A2.3 Decomposition of Changes in Vulnerability, (change in the percentage of GDP), continued Country Production effects Consumption effects Change in vulnerability Real Price Output GDP Total Price Oil Share Energy Intensity exchange rate Total Sudan Suriname Swaziland Sweden Switzerland Syrian Arab Republic Tajikistan Tanzania Thailand Togo Tonga Trinidad and Tobago Tunisia Turkey Uganda Ukraine United Kingdom United States Uruguay Uzbekistan Vanuatu Venezuela, R. B. de Vietnam Yemen, Rep. of Zambia Sources: EIA 2008b; World Bank 2008b; authors calculationsdata for Cambodia are taken from International Energy Agency, because Energy Information Administration data differ substantially and do not agree with direct country-based information. Data are for VULNERABILITY TO OIL PRICE INCREASES

71 Table A2.4 Decomposition of Changes in Vulnerability, (change in the percentage of GDP) Country Production effects Consumption effects Change in vulnerability Real Price Output GDP Total Price Oil Share Energy Intensity exchange rate Total Albania Algeria Angola Antigua and Barbuda Argentina Armenia Australia Austria Azerbaijan Bangladesh Belarus Belgium Belize Benin Bhutan Bolivia Bosnia & Herzegovina Botswana Brazil Brunei Darussalam Bulgaria Burkina Faso Burundi Cambodia a Cameroon Canada Cape Verde Extractive Industries for Development Series 61

72 Table A2.4 Decomposition of Changes in Vulnerability, (change in the percentage of GDP), continued Country Production effects Consumption effects Price Output GDP Total Price Oil Share Energy Intensity Real exchange rate Total Change in vulnerability Central African Republic Chad Chile China Colombia Comoros Congo, Rep. of Costa Rica Côte d Ivoire Croatia Cyprus Czech Republic Denmark Djibouti Dominica Dominican Republic Ecuador Egypt, Arab Rep. of El Salvador Equatorial Guinea Eritrea Estonia Ethiopia Fiji Finland France VULNERABILITY TO OIL PRICE INCREASES

73 Table A2.4 Decomposition of Changes in Vulnerability, (change in the percentage of GDP), continued Country Production effects Consumption effects Change in vulnerability Real Price Output GDP Total Price Oil Share Energy Intensity exchange rate Total Gabon Gambia, The Georgia Germany Ghana Greece Grenada Guatemala Guinea Guinea-Bissau Guyana Haiti Honduras Hungary Iceland India Indonesia Iran, Islamic Rep. of Ireland Israel Italy Jamaica Japan Jordan Kazakhstan Kenya Kiribati Korea, Rep. of Extractive Industries for Development Series 63

74 Table A2.4 Decomposition of Changes in Vulnerability, (change in the percentage of GDP), continued Country Production effects Consumption effects Price Output GDP Total Price Oil Share Energy Intensity Real exchange rate Total Change in vulnerability Kyrgyz Republic Lao PDR Latvia Lebanon Lesotho Liberia Lithuania Luxembourg Macedonia, FYR Madagascar Malawi Malaysia Maldives Mali Malta Mauritania Mauritius Mexico Moldova Mongolia Morocco Mozambique Namibia Nepal Netherlands New Zealand Nicaragua Niger VULNERABILITY TO OIL PRICE INCREASES

75 Table A2.4 Decomposition of Changes in Vulnerability, (change in the percentage of GDP), continued Country Production effects Consumption effects Change in vulnerability Real Price Output GDP Total Price Oil Share Energy Intensity exchange rate Total Nigeria Norway Pakistan Panama Papua New Guinea Paraguay Peru Philippines Poland Portugal Romania Russian Federation Rwanda Saint Kitts and Nevis Saint Lucia Samoa Saudi Arabia Senegal Seychelles Sierra Leone Singapore Slovakia Slovenia Solomon Islands South Africa Spain Sri Lanka Extractive Industries for Development Series 65

76 Table A2.4 Decomposition of Changes in Vulnerability, (change in the percentage of GDP), continued Country Production effects Consumption effects Change in vulnerability Real Price Output GDP Total Price Oil Share Energy Intensity exchange rate Total Sudan Suriname Swaziland Sweden Switzerland Syrian Arab Republic Tajikistan Tanzania Thailand Togo Tonga Trinidad and Tobago Tunisia Turkey Uganda Ukraine United Kingdom United States Uruguay Uzbekistan Vanuatu Venezuela, R. B. de Vietnam Yemen, Rep. of Zambia Sources: EIA 2008b; World Bank 2008b; authors calculations. a Data for Cambodia are taken from the International Energy Agency, because Energy Information Administration data differ substantially and do not agree with direct country-based information. Data are for VULNERABILITY TO OIL PRICE INCREASES

77 REFERENCES African Development Bank Group High Oil Prices and the African Economy. Concept paper prepared for the 2006 African Development Bank Annual Meetings. Ouagadougou: African Development Bank Group. Ang, B. W Decomposition Analysis for Policymaking in Energy: Which Is the Preferred Method? Energy Policy 32 (9): Ang, B. W., and N. Liu Negative-Value Problems of the Logarithmic Mean Divisia Index Decomposition Approach. Energy Policy 35 (1): Asia Pacific Energy Research Centre A Quest for Energy Security in the 21st Century: Resources and Constraints. Tokyo: Asia Pacific Energy Research Centre. APERC_2007_A_Quest_for_Energy_Security.pdf. Bacon, R., and M. Kojima Oil Price Risks: Measuring the Vulnerability of Oil Importers. Viewpoint 320 (June). OilPrices.pdf. Bacon, R., and S. Tordo Crude Oil Price Differentials and Differences in Oil Qualities: A Statistical Analysis. Energy Sector Management Assistance Program Technical Paper 081. World Bank, Washington, DC. Brown, J Declining Net Oil Exports: A Temporary Decline or a Long Term Trend? Financial Sense University. September Chung, H., and H. Rhee A Residual Free Decomposition of the Sources of Carbon Dioxide Emissions: A Case of the Korean Industries. Energy 26 (1): EIA (Energy Information Administration). 2008a. International Energy Outlook Washington, DC: EIA b. International Energy Statistics. EIA. emeu/international/contents.html. Accessed May 30, Extractive Industries for Development Series 67

78 . 2008c. Petroleum Spot Prices. dnav/pet/pet_pri_spt_s1_d.htm. Accessed on May 30, c. Petroleum Spot Prices. ESMAP dnav/pet/pet_pri_spt_s1_d.htm. (Energy Sector Management Accessed Assistance on May Program). 30, a. The Impact of Higher Oil Prices on Low Income Countries and on the Poor. Report ESMAP 299/05. (Energy Washington, Sector DC: Management ESMAP. Assistance Program). 2005a. The external/default/wdscontentserver/wdsp/ib/2005/04/01/ _200 Impact of Higher Oil Prices Low Income Countries and the Poor /Rendered/PDF/ESM PAPE1igherOilPrices1Bacon.pdf. Report 299/05. Washington, DC: ESMAP. external/default/wdscontentserver/wdsp/ib/2005/04/01/ _ /Rendered/PDF/ESM PAPE1igherOilPrices1Bacon.pdf. 2005b. The Vulnerability of African Countries to Price Shocks Major Factors and Policy Options: The Case of Oil Importing Countries. Report. 308/ b. Washington, The Vulnerability DC: ESMAP. of African Countries to Oil Price Shocks external/default/wdscontentserver/wdsp/ib/2005/10/06/ _200 Major Factors and Policy Options: The Case of Oil Importing Countries /Rendered/PDF/esm3080PAPER0v1ty0african0countries.pdf. Report 308/05. Washington, DC: ESMAP. external/default/wdscontentserver/wdsp/ib/2005/10/06/ _200 Essama-Nssah, /Rendered/PDF/esm3080PAPER0v1ty0african0countries.pdf. B., D. Go, M. Kearney, V. Korman, S. Robinson, and K. Thierfelder Economy-Wide and Distributional Impacts of an Oil Price Essama-Nssah, Shock on the B., South D. Go, African M. Kearney, Economy. V. Korman, Policy Research S. Robinson, Working and K. Paper Thierfelder World Bank, Economy-Wide Washington, DC. and Distributional Impacts of an Oil Price Shock on the South African Economy. Policy Research Working Forfás. Paper A Baseline World Bank, Assessment Washington, of Ireland s DC. Oil Dependence: Key Policy Considerations. Dublin: Forfás. Forfás A Baseline Assessment of Ireland s Oil Dependence: Key Policy nds_oil_dependence_report.pdf. Considerations. Dublin: Forfás. Gupta, nds_oil_dependence_report.pdf. E Oil Vulnerability Index of Oil-Importing Countries. Energy Policy 36 (3): Gupta, E Oil Vulnerability Index of Oil-Importing Countries. International Energy Policy Energy 36 (3): Agency Analysis of High Oil Prices on the Global Economy. Energy Prices and Taxes Second Quarter 2004: xi xix. International Energy Agency Analysis of High Oil Prices on the Kaya, Global Y Economy. Impact Energy of Carbon Prices and Dioxide Taxes Emission Second Quarter Control 2004: on GNP xi xix. Growth: Interpretation of Proposed Scenarios. Paper submitted to the Response Kaya, Y. Strategies Impact Working of Group, Carbon International Dioxide Emission Panel Control Climate on GNP Change. Growth: Energy Interpretation and Industry of Subgroup, Proposed Paris. Scenarios. Paper submitted to the Response Strategies Working Group, International Panel on Climate Lise, Change. W Energy Decomposition and Industry Subgroup, of CO 2 Emissions Paris. over in Turkey. Energy Policy 34 (14): Lise, W Decomposition of CO 2 Emissions over in Malik, Turkey. A Energy How Policy Pakistan 34 (14): Is Coping with the Challenge of High Oil Prices. Paper Munich: Munich Personal RePEc Archive. Malik, A How Pakistan Is Coping with the Challenge of High Oil Prices. Paper Munich: Munich Personal RePEc Archive VULNERABILITY TO OIL PRICE INCREASES

79 Sun, J. W Changes in Energy Consumption and Energy Intensity: A Complete Decomposition Model. Energy Economics 20 (1): United Nations Development Programme Overcoming Vulnerability to Rising Oil Prices: Options for Asia and the Pacific. Bangkok: United Nations Development Programme. World Bank Ukraine: The Impact of Higher Natural Gas and Oil Prices. Washington, DC: World Bank. INTUKRAINE/Resources/ /EnergyPricePolicyNote.pdf a. Country Classification. K2CKM78CC0. Accessed May 30, b. World Development Indicators. Washington, DC: World Bank. World Energy Council Europe s Vulnerability to Energy Crises: Executive Summary. London. World Energy Council. Extractive Industries for Development Series 69

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81 THE WORLD BANK OIL, GAS, AND MINING POLICY DIVISION The World Bank Group s role in the oil, gas, and mining sectors focuses on ensuring that its current interventions facilitate the extractive industries contribution to poverty alleviation and economic growth through the promotion of good governance and sustainable development. The Oil, Gas, and Mining Policy Division serves as the Bank s global sector management unit on extractive industries and related issues for all the regions of the world. It is part of the Oil, Gas, Mining, and Chemicals Department, a joint World Bank/International Finance Corporation department. Through loans, technical assistance, policy dialogue, and analytical work, the Division leads a work program with multiple sector activities in more than 70 countries, of which almost half are in Sub-Saharan Africa. More specifically, the Division: Advises governments on legal, fiscal, and contractual issues and on institutional arrangements as they relate to natural resources, as well as on good governance practices Assists governments in setting up environmental and social safeguards in projects in order to promote the sustainable development of extractive industries Helps governments formulate policies that promote private sector growth and foreign direct investments Advises governments on how to increase the access of the poor to clean commercial energy and to assess options for protecting the poor from high fuel prices The Oil, Gas, and Mining Policy Division serves as a global technical advisor that supports sustainable development by building capacity and providing extractive industry sector-related advisory services to resource-rich governments. The Division also carries out an advocacy role through its management of the following global programs: The Extractive Industries Transparency Initiative (EITI) multidonor trust fund, which supports countries in implementing EITI programs The Global Gas Flaring Reduction (GGFR) Public-Private Partnership, which brings governments and oil companies together to reduce gas flaring The Communities and Small-Scale Mining (CASM) Partnership, which promotes an integrated approach to addressing issues faced by artisanal and small-scale miners The Gender and Extractive Industries Program, which addresses gender issues in extractive industries The Petroleum Governance Initiative (PGI), which promotes good governance

82

83 PREFACE Extractive Industries for Development Series 73

84 PREFACE The World Bank 1818 H Street N.W. Washington, D.C USA (OR /oil OR /gas OR /mining) (OR /oil OR /gas OR /mining) 74 VULNERABILITY TO OIL PRICE INCREASES