The United States is experiencing a boom in energy production. Natural gas output increased
25 percent, and crude oil and other
liquids increased 30 percent during the
past five years, reducing net oil imports
by nearly 40 percent. The U.S. Energy
Information Administration (EIA, 2013)
baseline scenario shows U.S. production
of tight oil increasing until 2020 before
falling off during the next two decades.11
The baseline also shows U.S. shale gas
production increasing steadily until 2040
. The United States is expected
to be a net exporter of natural gas in
the 2020s.
Simulations from a large-scale model
(GEM) suggest modest impacts of the
energy boom on U.S. output.12 In GEM,
energy is produced by combining capital
and labor with a fixed factor, which can
be thought of as known reserves. As
discussed above, EIA expects production
of tight oil and shale gas to increase in
coming years but there is uncertainty
about the duration and extent of the
increase. The model is simulated under the assumption that there is an increase in energy
production over the next 12 years so that by the end of this time horizon production has
increased by 1.8 percent of GDP.
(11 Tight oil is petroleum found in formations of low permeability, generally shale or tight sandstone)
The main finding is that the U.S. GDP increases by about 1.2% at the end of 13 years and employment
increases by 0.5%. This is under the assumption that the increase in energy production is fully anticipated by households and firms. The corresponding increase in domestic demand is about 1.8%. The decline in the cost of energy induces firms to employ more capital and labor. Adjustment costs in
investment encourage firms to start putting capital in place even before all the declines in energy prices materialize. In addition to the increase in investment, consumption also rises because of rising household real incomes and wealth. The impacts on GDP levels in other country blocs are also positive,with the exception of a very small decrease in the GDP of other energy-exporting countries.
The main reason for the modest impact on U.S. GDP is that the share in the economy remains quite small even after factoring in the addtional production. The impacts are greater when the economy exhibits slack because in this case monetary policy does not need to lean against the resulting increase in aggregate demand.
In terms of the impact on U.S. Current Account the improvement in the energy component of the trade balance is offset by a decline in the non-energy balance.
In the case where the increase in energy supplies is fully anticipated, U.S. households and corporations temporarily increase
borrowing from abroad to support higher consumption (anticipating the wealth increase from
higher energy production) and investment. The appreciation of the U.S. dollar reduces import
prices and also contributes to the increase in the non-energy balance. Overall, the result is a
small decline in the current account balance
In recent years, West Texas Intermediate (WTI)
prices fell substantially below Brent prices as a
supply surge from unconventional energy sources
in the United States and Canada, and difficulties
in moving this supply to U.S. refining hubs led to
a build-up of inventories. But the differential has
narrowed this year.
To understand fundamental oil price drivers, a
sign-restricted structural vector autoregressive
model is estimated using four variables: global
crude oil production, global industrial production,
the real price of Brent crude oil, and Organization
for Economic Cooperation and Development crude
oil inventories .
Brent competes
more closely with North and West African and
Middle Eastern crude oil varieties, hence its price is
more exposed to precautionary demand stemming
from geopolitical risk. Risk premiums and the
prevailing Brent futures term structure also attract
financial investors.
WTI prices have been
influenced more by global supply conditions,
particularly the boom in North
American supply and crude oil transportation
constraints since 2009—and less by speculative
demand. More recently, infrastructure bottlenecks
have eased and speculative and
seasonal demand increased, raising WTI and
narrowing the spread. But this narrowing may not
prove durable. Seasonal U.S. demand will dissipate
in the third quarter, and sufficient crude oil
infrastructure to carry oil from the middle of the
United States to the Gulf coast will not be
reconfigured and completed until late next year.
Therefore, downward pressures on WTI could
continue, altering the WTI futures term structure
and lowering recent investor interest.
25 percent, and crude oil and other
liquids increased 30 percent during the
past five years, reducing net oil imports
by nearly 40 percent. The U.S. Energy
Information Administration (EIA, 2013)
baseline scenario shows U.S. production
of tight oil increasing until 2020 before
falling off during the next two decades.11
The baseline also shows U.S. shale gas
production increasing steadily until 2040
. The United States is expected
to be a net exporter of natural gas in
the 2020s.
Simulations from a large-scale model
(GEM) suggest modest impacts of the
energy boom on U.S. output.12 In GEM,
energy is produced by combining capital
and labor with a fixed factor, which can
be thought of as known reserves. As
discussed above, EIA expects production
of tight oil and shale gas to increase in
coming years but there is uncertainty
about the duration and extent of the
increase. The model is simulated under the assumption that there is an increase in energy
production over the next 12 years so that by the end of this time horizon production has
increased by 1.8 percent of GDP.
(11 Tight oil is petroleum found in formations of low permeability, generally shale or tight sandstone)
The main finding is that the U.S. GDP increases by about 1.2% at the end of 13 years and employment
increases by 0.5%. This is under the assumption that the increase in energy production is fully anticipated by households and firms. The corresponding increase in domestic demand is about 1.8%. The decline in the cost of energy induces firms to employ more capital and labor. Adjustment costs in
investment encourage firms to start putting capital in place even before all the declines in energy prices materialize. In addition to the increase in investment, consumption also rises because of rising household real incomes and wealth. The impacts on GDP levels in other country blocs are also positive,with the exception of a very small decrease in the GDP of other energy-exporting countries.
The main reason for the modest impact on U.S. GDP is that the share in the economy remains quite small even after factoring in the addtional production. The impacts are greater when the economy exhibits slack because in this case monetary policy does not need to lean against the resulting increase in aggregate demand.
In terms of the impact on U.S. Current Account the improvement in the energy component of the trade balance is offset by a decline in the non-energy balance.
In the case where the increase in energy supplies is fully anticipated, U.S. households and corporations temporarily increase
borrowing from abroad to support higher consumption (anticipating the wealth increase from
higher energy production) and investment. The appreciation of the U.S. dollar reduces import
prices and also contributes to the increase in the non-energy balance. Overall, the result is a
small decline in the current account balance
In recent years, West Texas Intermediate (WTI)
prices fell substantially below Brent prices as a
supply surge from unconventional energy sources
in the United States and Canada, and difficulties
in moving this supply to U.S. refining hubs led to
a build-up of inventories. But the differential has
narrowed this year.
To understand fundamental oil price drivers, a
sign-restricted structural vector autoregressive
model is estimated using four variables: global
crude oil production, global industrial production,
the real price of Brent crude oil, and Organization
for Economic Cooperation and Development crude
oil inventories .
Brent competes
more closely with North and West African and
Middle Eastern crude oil varieties, hence its price is
more exposed to precautionary demand stemming
from geopolitical risk. Risk premiums and the
prevailing Brent futures term structure also attract
financial investors.
WTI prices have been
influenced more by global supply conditions,
particularly the boom in North
American supply and crude oil transportation
constraints since 2009—and less by speculative
demand. More recently, infrastructure bottlenecks
have eased and speculative and
seasonal demand increased, raising WTI and
narrowing the spread. But this narrowing may not
prove durable. Seasonal U.S. demand will dissipate
in the third quarter, and sufficient crude oil
infrastructure to carry oil from the middle of the
United States to the Gulf coast will not be
reconfigured and completed until late next year.
Therefore, downward pressures on WTI could
continue, altering the WTI futures term structure
and lowering recent investor interest.
Source: FMI
