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### Introduction and overview
- Commodity prices described as "one of the most volatile."
- Since 2000, real aggregate commodity prices experienced three episodes of continuous rising by more than 30 percent.
- Real commodity prices rose by about 150 percent between April 2020 and August 2022, led by a fivefold increase in the average price of energy commodities (oil, natural gas, coal).
- The surge in energy prices was driven by the robust post-pandemic recovery and disruptions caused by Russia’s invasion of Ukraine.
- Commodities, most notably energy commodities, account for a significant share of global trade and are geographically concentrated in production; their price swings often exhibit a negative correlation with the US dollar (Figure 2.1).

### Purpose, scope, and data
- Documents key characteristics of price swings of 42 commodities.
- Zooms in on energy price swings, focusing on oil.
- Focuses on two key drivers of oil prices: global economic activity and oil supply shocks.
- Examines effects on the global economy and groups of countries (energy importers and exporters).
- Analyzes how policies and country characteristics could mitigate adverse effects for energy importers with limited international risk sharing.
- Discusses implications of a permanent shift to a positive oil–US dollar correlation and potential effects of the clean energy transition on exporters of fossil fuels and critical metals.
- Real commodity prices: nominal price series from the IMF Primary Commodity Price System deflated by the US consumer price index.
- Commodity group prices: weighted average of individual commodity prices based on the average of global import share of 2014–16.
- Coverage: 42 commodities and four commodity groups (energy, metals, food, agricultural), over 1960 to 2023.
- Identified phases: about 362 upswing and 363 downswing phases for 42 commodities.

### Methodology and empirical approach
- Price-swing dating modifications:
  - Time series are not filtered to avoid losing large, short-lived fluctuations.
  - No minimum duration imposed, capturing short but sharp swings.
  - A larger window (±24 months) is used to identify peaks and troughs.
- Oil price drivers: structural VAR from Baumeister and Hamilton (2019) estimated with monthly data on global crude oil production, real oil prices, inventories, and global industrial production from January 1995 to May 2023.
- Local projections (LP) approach used to estimate normalized impulse responses; impulse responses scaled to increase the energy price by 10 percent on impact.
- Estimation sample for global variable propagation: 1996:Q1 to 2023:Q2.
- Regression controls: four lags of the log changes in the global variable of interest, plus contemporaneous and one-quarter lag of the other shocks in the global oil market VAR.

### Features of commodity price swings
- Duration: price swings have comparable durations across commodities.
- Magnitude:
  - Energy commodity group: prices typically triple during an upswing and fall by almost as much during a downswing.
  - Other commodity prices: typically double during upswings and nearly halve during downswings.
- Co-movement:
  - Strong co-movement documented.
  - PCA (39 monthly real commodity prices, 1980–2023): first component explains 40 percent of variance; first two components explain 60 percent.
  - Correlations of first principal component: energy prices 0.79 on average; metals prices 0.74 on average; food prices 0.50 on average.

### Energy price swings — structural drivers and focus
- Four structural drivers from the oil market VAR:
  - Global economic activity shock (alters demand for all commodities, including oil).
  - Oil consumption demand shock (preference shifts for oil relative to other energy inputs).
  - Oil inventory demand shock (precautionary demand for inventories).
  - Oil supply shock (exogenous change in oil production).
- Chapter focus:
  - Global activity shocks (highly correlated with the global factor affecting many commodity prices).
  - Oil supply shocks (pose adjustment challenges for energy importers, the majority of world economies).

### Empirical impulse-response findings (normalized to a 10 percent on-impact energy price increase)
- Global activity shock:
  - Following a positive global activity shock that increases the real energy price by 10 percent on impact, global industrial production increases by about ¾ percent on impact.
  - Real energy prices: peak three quarters after the shock and remain statistically significant for about eight quarters.
  - Oil production: picks up gradually and remains positive and statistically significant for about six quarters.
- Oil supply shock:
  - Real energy prices: peak effect reached slightly earlier; energy prices show a tapering (hump-shaped) response.
  - Oil production: falls more persistently; effects remain statistically significant for three years.
  - Global industrial production: a negative oil supply shock brings about a decline in global industrial production by 1 percent after eight quarters (following some initial uptick).

### Heterogeneous country impacts — exporters versus importers
- General:
  - Higher energy prices accompany current account improvements for energy exporters and deteriorations for energy importers, regardless of the source.
- When energy prices rise owing to stronger global economic activity or higher demand for oil consumption or inventories:
  - Output and consumption rise for both exporters and importers, despite negative terms-of-trade effect for importers.
- When energy prices rise owing to a negative oil supply shock:
  - Exporters’ output increases.
  - Importers’ output and consumption fall, although some risk sharing occurs, including via valuation gains in importers’ net foreign assets.
- Sample classification: a country is a net energy exporter (importer) if its median net energy export share over the sample period is above (below) zero. Sample includes 11 net energy exporters and 33 net energy importers.

### Quantified impacts (Annex 2.5 empirical impulse responses)
- Global activity shock (10 percent energy price increase on impact):
  - Current account (percent of GDP): Exporters improve by 1 percentage point after four quarters; Importers decline to −1 percentage point in two years.
  - Consumption, investment, output: Both exporters and importers increase in real output, consumption, investment, inflation, and fiscal balances; magnitudes more modest for importers.
  - Interest rates and exchange rates: Importers’ interest rates rise less than exporters’, resulting in depreciation of their exchange rates relative to exporters.
- Oil supply shock (10 percent energy price increase on impact) — importers, two years after shock:
  - Current account balance falls by about 0.5 percentage point two quarters after the shock.
  - Real consumption falls by about 1.5 percent after two years.
  - Real investment falls by about 2.5 percent after two years.
  - Real output falls by about 0.8 percent after two years.
- Exchange rate and valuation effects:
  - Depreciations improve nonenergy trade balance and produce positive valuation effects on net international investment position.
  - Capital inflows to the private sector (portfolio debt) aid adjustment; capital inflows to the public sector decline despite higher fiscal deficit.
  - Exporters: consumption remains broadly unchanged for the first two years, indicating limits to international risk sharing.

### State-dependent responses and cross-country mitigating factors for importers (Annex 2.5)
- Financial conditions:
  - Tighter global financial conditions (measured by BAA spread) weaken importers’ borrowing capacity, necessitating greater adjustments (larger cuts in consumption and investment).
  - Financial tightening associated with US monetary shocks leads to a more gradual downward adjustment in consumption and investment than tightening associated with higher global risk aversion.
- Cross-border investment:
  - Importers with higher FDI in energy-exporting countries experience more positive valuation effects on net foreign assets, allowing smaller reductions in consumption and investment and a larger decline in the current account.
- Government debt:
  - Importers with lower government debt allow greater borrowing, facilitating a smoother adjustment: smaller increases in borrowing costs, higher capital inflows to private and public sectors, credit to the nonfinancial sector broadly unchanged, and smaller declines in consumption and investment; accompanied by a larger decline in the current account.
- Exchange rate flexibility:
  - More flexible exchange rate regimes allow sharper currency depreciation, higher exports, and shallower declines in consumption and output. Central banks raise interest rates by less, helping reduce a decline in credit to the nonfinancial sector.
- Inflation expectations:
  - Better-anchored inflation expectations allow central banks to adopt a more accommodative stance, supporting investment and consumption and allowing greater exchange rate depreciation to absorb the shock.
- External positions:
  - Importers with stronger external positions (IMF staff current account gap ≥ −1 percent of GDP) experience larger capital inflows, shallower declines in consumption and investment, and larger deteriorations in current account balances, reducing financing risks.
- Energy dependence:
  - Importers with lower dependence on energy imports experience smaller terms-of-trade effects, less deterioration in energy trade balance, and smaller declines in consumption, investment, and real output.

### Model simulations (FSGM) — setup and illustrative results
- Model: IMF’s Flexible System of Global Models (FSGM), using the G20MOD module (includes every Group of Twenty (G20) economy and five additional regions).
- Shocks simulated:
  - Temporary shock to private domestic demand applied equally to all countries (global demand shock).
  - Exogenous temporary reduction in oil supply applied equally to all oil-producing countries (oil supply shock).
  - Both shocks calibrated so real global oil prices increase by 10 percent on impact.
- Commodity sector: three commodities—oil, food, metals—priced in US dollars. Commodity prices affect activity via higher inflation deflating real household income and wealth, higher production costs reducing hiring, and possible second-round effects prompting monetary tightening.
- Illustrative results:
  - Global demand shock: output increases for both exporters and importers while raising oil prices; higher oil prices improve exporters’ current account and initially deteriorate importers’ current account.
  - Oil supply shock: temporary reduction in oil supply leads to temporary increase in oil prices (10 percent on impact) with distributional effects described above.

### Oil–US dollar correlation: change and implications
- Historical pattern:
  - From the 1970s to the 1990s, correlation alternated between positive and negative signs.
  - Since the 2000s, correlation remained negative for two decades until shifting to positive since early 2020.
- Rolling correlation illustrated with a 36-month window spanning January 2000 to May 2023.
- Contributing factors discussed:
  1. The United States shifting from a net oil importer to a net exporter around early 2020.
  2. Bouts of high global risk aversion and the BAA spread.
  3. Increased foreign investor purchases of US assets following oil price increases since 2020.
- Regime-specific empirical findings:
  - During periods of positive correlation: the US dollar appreciates in response to negative oil supply shocks that lead to an oil price increase; the US dollar shows no significant response to the other three shocks.
  - During periods of negative correlation: the US dollar depreciates in response to any of the four structural shocks that increase the oil price.
- Potential macro implications if positive correlation persists:
  - Larger terms-of-trade shocks due to oil prices for net oil importers with a floating exchange rate.
  - Greater financial stability risks for importers with short (net) exposure to the US dollar.
  - Dollar-pegging oil exporters: currency appreciation with oil price increases can help cool domestic economy and reduce need for fiscal tightening; reverse operates when oil prices fall.
  - Countries with sovereign wealth funds long on the US dollar: valuation changes of external wealth move with oil prices, increasing the cost (in US dollar terms) of fiscal stimulus when oil price falls.
  - Net oil importers with floating exchange rates: positive correlation amplifies terms-of-trade shocks due to simultaneous rising oil prices and weaker local currency; may require tighter monetary policy and face larger output losses where second-round inflation effects are large.
  - Net oil importers with net short US dollar exposure on balance sheets: depreciation raises the cost of servicing foreign-currency liabilities, increasing financial stability risks.

### Clean energy transition — stylized effects and policy implications
- Transition requires large reductions in fossil fuel production and consumption to limit global temperature increases below 2 degrees Celsius by 2050.
- Transition will boost demand for critical metals such as copper, nickel, cobalt, and lithium.
- Stylized modeling treats the transition as a permanent change in relative prices: lower relative price of fossil fuels and higher relative price of critical metals.
- Modeled calibration (FSGM variants; G20MOD; FSGM for Latin America):
  - Permanent 20 percent decline in the real price of oil and a permanent 20 percent increase in the real price of copper.
- Fossil fuel exporters (G20MOD results, deviations from World Economic Outlook baseline):
  - Permanently lower oil prices reduce the return on capital, leading firms to cut investment sharply and for an extended period; firms cut demand for labor, reducing household income and consumption.
  - Central banks cut the interest rate to support the economy.
  - Real exchange rate depreciates, real exports of noncommodities improve, real imports fall.
  - Large drop in investment implies an improvement in the current account balance, while output declines incrementally.
- Critical metal exporters (Chile case, deviations from World Economic Outlook baseline):
  - Permanently higher copper prices trigger a large investment boom in the copper-producing industry; firms hire more workers, increasing consumption and real output.
  - Central bank hikes interest rates and the real exchange rate appreciates.
  - Current account turns sharply negative driven by the investment boom and weaker real exports.
- Policy needs:
  - Fossil fuel exporters: facilitate reallocation of resources across sectors; active labor market policies (job search assistance and retraining); structural reforms to enable private sector response and growth in less carbon-intensive and green sectors.
  - Critical mineral exporters: improve fiscal capacity to prudently manage windfalls from higher commodity exports; reduce structural barriers to promote economic diversification and mitigate resource curse risks.

### Manufacturing and energy-cost effects (aggregate, 2000–22)
- Energy cost in European countries increased by 3 percentage points on average in 2022 from 7 percent of the gross value added in 2021.
- Natural gas and electricity prices were main drivers; together account for 70 and 80 percent of energy consumed by manufacturing sectors in France and Germany, respectively.
- Sectoral heterogeneity:
  - Basic metals production energy costs amount to 60 to 70 percent of gross value added.
  - German manufacturing sector experienced the largest increase (pretax) in energy costs; the smallest increase observed in France.
- Taxes and government interventions:
  - In 2021, taxes and fees ranged between 4 percent (United Kingdom) and 40 percent (Germany) of the total energy cost.
  - These values reduced to 3 to 10 percent in 2022–23 as governments reduced taxes and introduced other mechanisms to help manufacturing sectors cope with increased energy prices.
  - Fiscal measures provided short-term relief but, if sustained, could reduce firms’ incentives to improve energy efficiency.

### Key statistics from the European energy price episode
- Wholesale price peaks in August 2022 (compared to 2019–21 average):
  - Natural gas: 1,100 percent.
  - Coal: 600 percent.
  - Electricity: 1,600 percent.
- For electricity in 2021, taxes and charges as share of retail prices:
  - United Kingdom: 4 percent of retail prices.
  - Germany: 48 percent of retail prices.

### Real oil prices and sectoral model outcomes (selected model figure takeaways)
- FSGM impulse responses to a permanent decline in global real oil prices (representative oil exporters):
  - Real private investment: percent deviations from baseline down to −30 on the vertical axis (illustrating substantial negative percent deviation).
  - Real effective exchange rate: percent deviations from baseline down to −14 (depreciation, + = appreciation).
  - Current account balance to GDP: percentage-point deviations from baseline up to 2.5 over horizon t to t + 7 (improvement in current account).

### Policy recommendations (synthesis)
- For energy importers to mitigate adverse spillovers:
  - Anchor inflation expectations to allow more accommodative monetary policy.
  - Maintain more flexible exchange rate regimes so exchange rate can act as an effective shock absorber.
  - Reduce government debt and strengthen external positions to sustain investor confidence and borrowing capacity.
  - Implement policies to reduce energy imports (for example, improve energy efficiency) to limit exposure to energy price swings.
  - Promote greater financial integration and strengthen the global financial safety net to foster international risk sharing.
- For fossil fuel exporters facing the clean energy transition:
  - Facilitate reallocation of resources across sectors.
  - Implement active labor market policies: job search assistance and retraining for displaced workers.
  - Pursue structural reforms to enable private sector response and growth in less carbon-intensive and green sectors.
- For critical mineral exporters:
  - Improve fiscal capacity to prudently manage windfalls from higher commodity exports.
  - Reduce structural barriers to promote economic diversification and mitigate resource curse risks.

*International Monetary Fund. Chapter 2, "Navigating the Tides of Commodity Prices," 2024 External Sector Report (ch2 - Introduction; Annex 2.5; sections 1–2 excerpts).*

### Introduction

### ch2 - Introduction

### Overview
- Commodity prices are described as "one of the most volatile."
- Since 2000, real aggregate commodity prices have undergone three episodes of continuous rising by more than 30 percent.
- Most recently, real commodity prices rose by about 150 percent between April 2020 and August 2022, led by a fivefold increase in the average price of energy commodities (oil, natural gas, coal).
- The surge in energy prices was driven by the robust post-pandemic recovery and disruptions caused by Russia’s invasion of Ukraine.
- Commodities, most notably energy commodities, account for a significant share of global trade and are geographically concentrated in production. Their price swings often exhibit a negative correlation with the US dollar (Figure 2.1).

### Key challenges looking ahead
- Clean energy transition:
  - Requires major transformation of the energy system with a shift away from fossil fuels to an increasing use of some critical metals, such as copper.
  - Expected to bring about permanent changes in the price of fossil fuels and critical metals and reshape trade flows; concentration in production of most metals is even higher than that of fossil fuels.
- Change in oil–dollar correlation:
  - The negative correlation between the oil price and the dollar has turned positive since 2020.
  - If persistent, this shift could carry substantial macroeconomic implications for the global economy and individual commodity-trading countries.

### Purpose and scope of the chapter
- Documents key characteristics of the price swings of 42 commodities.
- Zooms in on energy price swings, focusing on oil as the prominent energy commodity.
- Focuses on two key drivers of oil prices: global economic activity and oil supply shocks.
- Examines effects on the global economy and groups of countries (energy importers and exporters).
- Analyzes how policies and country characteristics could mitigate adverse effects for energy importers with limited international risk sharing.
- Discusses implications of a permanent shift to a positive oil–US dollar correlation and potential effects of the clean energy transition on exporters of fossil fuels and critical metals.

### Methodology and data highlights
- Real commodity prices are calculated by deflating the nominal price series from the IMF Primary Commodity Price System by the US consumer price index.
- Commodity group prices are calculated as the weighted average of individual commodity prices based on the average of global import share of 2014–16.
- Price-swing dating procedures follow standard business cycle and commodity price swing methods with three modifications:
  - Time series are not filtered to avoid losing large, short-lived fluctuations.
  - No minimum duration is imposed, capturing short but sharp swings (for example, a six-month oil price downswing during the global financial crisis).
  - A larger window (±24 months) is used to identify peaks and troughs.
- For oil price drivers, the chapter relies on the structural VAR from Baumeister and Hamilton (2019), estimated with monthly data on global crude oil production, real oil prices, inventories, and global industrial production from January 1995 to May 2023.
- A local projections (LP) approach is used to estimate normalized impulse responses; impulse responses are scaled to increase the energy price by 10 percent on impact.

### Features of commodity price swings
- Coverage: 42 commodities and four commodity groups (energy, metals, food, agricultural), over 1960 to 2023.
- Identified phases: about 362 upswing and 363 downswing phases for 42 commodities.
- Duration: Price swings have comparable durations across commodities.
- Magnitude:
  - Energy commodity group exhibits the most pronounced swings: energy prices typically triple during an upswing and fall by almost as much during a downswing.
  - Other commodity prices typically double during upswings and nearly halve during downswings.
- Co-movement: Strong co-movement among commodity prices is documented (see Box 2.2 referenced in the chapter).

### Energy price swings — drivers and empirical focus
- The oil market VAR uncovers four structural drivers of oil prices:
  - Global economic activity shock (alters demand for all commodities, including oil).
  - Oil consumption demand shock (captures preference shifts for oil relative to other energy inputs).
  - Oil inventory demand shock (reflects precautionary demand for inventories).
  - Oil supply shock (exogenous change in oil production).
- The chapter focuses on two shocks:
  - Global activity shocks (highly correlated with the global factor affecting a broad set of commodity prices).
  - Oil supply shocks (pose adjustment challenges for energy importers, the majority of world economies).

### Empirical results — propagation and heterogeneous impacts (summary)
- Estimation sample for global variable propagation: 1996:Q1 to 2023:Q2.
- Regression controls: four lags of the log changes in the global variable of interest, plus contemporaneous and one-quarter lag of the other shocks in the global oil market VAR.
- Transitory but persistent effects on energy prices and global variables:
  - Following a positive global activity shock that increases the real energy price by 10 percent on impact, global industrial production increases by about ¾ percent on impact.
- Heterogeneous country impacts depend on importer/exporter status and shock source:
  - Higher energy prices are accompanied by current account improvements for energy exporters and deteriorations for energy importers, regardless of the source of energy price changes.
  - When energy prices rise owing to stronger global economic activity or higher demand for oil consumption or inventories:
    - Output and consumption rise for both exporters and importers, despite the negative terms-of-trade effect for importers.
  - When energy prices rise owing to a negative oil supply shock:
    - Exporters’ output increases.
    - Importers’ output and consumption fall, although some risk sharing occurs, including via valuation gains in importers’ net foreign assets.
- Cross-country variation in importer exposure and mitigating factors:
  - Adverse effects of negative oil supply shocks on energy importers are mitigated by:
    - Greater exchange rate flexibility.
    - Lower government debt.
    - More anchored inflation expectations.
    - Stronger external positions.
    - Lower intensity of energy imports.
    - Looser global financial conditions, which allow a smaller decline in consumption and a larger external borrowing (i.e., decline in the current account).
  - Foreign investments in major oil-exporting economies also mitigate adverse effects by allowing importers to partake in exporters’ economic improvement.

### Oil–US dollar correlation and implications
- Following two decades of negative correlations, the relationship between the US dollar and the oil price has turned positive since 2020.
- This change coincided with the shift of the United States from a net oil importer to a modest oil exporter in early 2020 and coincides with periods of high global risk aversion and changes in foreign investor behavior (after an increase in the oil price, foreign investors now tend to increase their holdings of US assets).
- Potential implications if the positive correlation is persistent:
  - Larger terms-of-trade shocks due to oil prices for net oil importers with a floating exchange rate.
  - Greater financial stability risks for importers with short (net) exposure to the US dollar.

### Clean energy transition implications for exporters
- A permanently lower price for fossil fuel commodities:
  - Brings about weaker GDP growth for exporters.
  - Triggers an initial improvement in the current account for exporters.
- A permanently higher price for critical metals:
  - Triggers an initial investment boom in exporting countries that worsens their current accounts and gradually improves output.
- Exporters of fossil fuels and critical metals face challenges and potential benefits during the transition.

### Contribution to literature and chapter structure
- The chapter provides empirical evidence on impacts of oil supply and global activity shocks on a broad set of macro and external variables for an extensive list of countries.
- Uses a large panel of exporters and importers to strengthen estimation of average impacts and explores heterogeneity across importers’ structural characteristics and policy regimes.
- Structure of the chapter:
  - Section 1: Stylized facts on commodity price swings.
  - Section 2: Estimates of impacts of oil supply and global activity shocks, complemented by model-based simulations.
  - Section 3: Discussion of oil price–US dollar correlation and implications of the clean energy transition.
  - Final section: Conclusions.

*International Monetary Fund. Chapter 2, "Navigating the Tides of Commodity Prices," 2024 External Sector Report (ch2 - Introduction).*

### Annex 2.5.

### Annex 2.5.

### Methodology and Data Notes
- Quarterly oil shock series are computed as averages of the monthly shocks following Kilian, Rebucci, and Spatafora (2009).
- Instrumental variables local projections (LP-IV) are used for unit effect normalization (Stock and Watson 2018). See Li, Plagborg-Møller, and Wolf (2024) for discussion of LP versus VAR.
- Impulse responses in figures show effects of oil supply (red) and global activity (blue) shocks that increase real energy price by 10 percent on impact with 68 and 90 percent confidence intervals.
- Sample classification: a country is a net energy exporter (importer) if its median net energy export share over the sample period is above (below) zero. Sample includes 11 net energy exporters and 33 net energy importers.

### Effects of Global Activity and Oil Supply Shocks (Empirical Impulse Responses)
- Real energy prices:
  - Global activity shock: prices peak three quarters after the shock and remain statistically significant for about eight quarters.
  - Oil supply shock: peak effect reached slightly earlier; energy prices show a tapering (hump-shaped) response.
- Oil production:
  - Global activity shock: oil production picks up gradually and remains positive and statistically significant for about six quarters.
  - Oil supply shock: oil production falls more persistently; effects remain statistically significant for three years.
- Global industrial production:
  - A negative oil supply shock brings about a decline in global industrial production by 1 percent after eight quarters (following some initial uptick).

### Impact on Exporters versus Importers (Global Activity Shock; 10 percent energy price increase on impact)
- Current account (percent of GDP):
  - Exporters: improve by 1 percentage point after four quarters.
  - Importers: decline to −1 percentage point in two years.
- Consumption, investment, output:
  - Both exporters and importers: increase in real output, consumption, investment, inflation, and fiscal balances.
  - Magnitudes are more modest for importers: consumption, investment, and output increase less relative to exporters.
- Interest rates and exchange rates:
  - Importers: interest rates rise less than exporters, resulting in depreciation of their exchange rates relative to exporters.
- Mechanism for exporters: higher saving temporarily from increased export revenues offsets rising investment, improving current account balances.

### Impact on Exporters versus Importers (Oil Supply Shock; 10 percent energy price increase on impact)
- Distributional effects:
  - Importers bear larger burden due to inelastic demand and limited international risk sharing.
- Current account (percent of GDP), consumption, investment, output (importers, two years after shock):
  - Current account balance falls by about 0.5 percentage point two quarters after the shock.
  - Real consumption falls by about 1.5 percent after two years.
  - Real investment falls by about 2.5 percent after two years.
  - Real output falls by about 0.8 percent after two years.
- Exchange rates, valuation, and capital flows:
  - Exchange rate depreciations improve nonenergy trade balance and produce positive valuation effects on net international investment position.
  - Capital inflows to the private sector (portfolio debt) aid adjustment; capital inflows to the public sector decline despite higher fiscal deficit.
- Exporters: consumption remains broadly unchanged for the first two years, indicating limits to international risk sharing.

### Energy Importers under Oil Supply Shocks — State-Dependent Responses and Country Characteristics
- Financial conditions:
  - Tighter global financial conditions (measured by BAA spread) weaken importers’ borrowing capacity, necessitating greater adjustments (larger cuts in consumption and investment).
  - Financial tightening associated with US monetary shocks leads to a more gradual downward adjustment in consumption and investment than tightening associated with higher global risk aversion.
- Cross-border investment:
  - Importers with higher foreign direct investment (FDI) in energy-exporting countries experience more positive valuation effects on net foreign assets, allowing smaller reductions in consumption and investment and a larger decline in the current account.
- Government debt:
  - Importers with lower government debt allow greater borrowing, facilitating a smoother adjustment: smaller increases in borrowing costs, higher capital inflows to private and public sectors, credit to the nonfinancial sector broadly unchanged, and smaller declines in consumption and investment; accompanied by a larger decline in the current account.
- Exchange rate flexibility:
  - More flexible exchange rate regimes allow sharper currency depreciation, higher exports, and shallower declines in consumption and output. Central banks raise interest rates by less, helping reduce a decline in credit to the nonfinancial sector.
- Inflation expectations:
  - Better-anchored inflation expectations allow central banks to adopt a more accommodative stance, supporting investment and consumption and allowing greater exchange rate depreciation to absorb the shock.
- External positions:
  - Importers with stronger external positions (IMF staff current account gap ≥ −1 percent of GDP) experience larger capital inflows, shallower declines in consumption and investment, and larger deteriorations in current account balances, reducing financing risks.
- Energy dependence:
  - Importers with lower dependence on energy imports experience smaller terms-of-trade effects, less deterioration in energy trade balance, and smaller declines in consumption, investment, and real output.

### Model Simulations (FSGM) — Setup and Key Features
- Model: IMF’s Flexible System of Global Models (FSGM), using the G20MOD module (includes every Group of Twenty (G20) economy and five additional regions).
- Shocks simulated:
  - Temporary shock to private domestic demand applied equally to all countries (global demand shock).
  - Exogenous temporary reduction in oil supply applied equally to all oil-producing countries (oil supply shock).
  - Both shocks calibrated so real global oil prices increase by 10 percent on impact.
- Relevant model features:
  - Commodity sector: three commodities—oil, food, metals—priced in US dollars. Commodity prices affect activity via (1) higher inflation deflating real household income and wealth, (2) higher production costs reducing hiring, (3) possible second-round effects prompting monetary tightening.
  - Monetary authorities and interest rates: monetary policy represented by an inflation-forecast-based interest rate rule under flexible exchange rates (adjustable to replicate less flexible regimes). Interest rates relevant for consumption and investment relate to policy rate but include risk premiums.
  - External sector: exports and imports determined by domestic and foreign demand and exchange rates. Investment, saving, and fiscal policy determine the current account. Exchange rates determined by interest rate parity in short run and external sustainability in long run.

### Model Simulation Results (Illustrative)
- Global demand shock:
  - Output increases for both exporters and importers while raising oil prices.
  - Higher oil prices improve exporters’ current account and initially deteriorate importers’ current account.
  - Output and consumption increase for both exporters and importers on the force of the global demand shock.
- Oil supply shock:
  - Temporary reduction in oil supply leads to temporary increase in oil prices (10 percent on impact) with distributional effects described above for exporters and importers.

*Source: IMF staff calculations, Annex 2.5.*

### 1. Real Oil Prices

### ch2 - 1. Real Oil Prices

### Impulse responses and model results
- The Flexible System of Global Models impulse responses illustrate impacts of:
  - Oil supply shocks and global activity shocks on real oil prices, world real output, and representative oil exporters and importers.
  - Panels include scenarios for importers with lower government debt and for importers with a more fixed exchange rate regime (managed floating).
- Key modeled outcomes:
  - A negative oil supply shock raises oil prices while lowering global output.
  - Under a global activity shock that increases oil prices, importers fare worse than exporters but still see rises in output and consumption—albeit less than exporters.

### Effects on oil importers versus oil exporters
- Oil importers facing a negative oil supply shock:
  - Higher headline inflation and weaker terms of trade.
  - Decline in household real income and consumption.
  - Lower firm investment and a negative output gap.
  - Central bank tends to ease policy in response to downturn and limited pass-through to core inflation.
  - Currency depreciates; depreciation helps net exports but current account deteriorates due to a higher energy import bill.
- Oil exporters facing higher oil prices:
  - Increased consumption, investment, output, and current account.

### Role of government debt and exchange rate regime
- Lower government debt in importers:
  - Leads to lower borrowing costs (lower risk premiums).
  - Firms reduce investment and employment by less; real wages and household consumption are higher than in higher-debt importers.
  - Stronger domestic demand raises inflation and triggers monetary tightening and currency appreciation.
  - Appreciation and stronger domestic demand dampen exports, strengthen imports, worsen net exports, and expand external borrowing.
- Less flexible exchange rate regimes (managed floating) for importers:
  - Following depreciation from oil supply shocks, central banks raise policy rates to stabilize the exchange rate.
  - Higher interest rates dampen consumption and output and reduce currency depreciation, limiting medium-term current-account improvement.

### Policy implications and recommendations
- Policies to mitigate adverse spillovers for importers:
  - Anchor inflation expectations to allow more accommodative monetary policy.
  - Maintain more flexible exchange rate regimes so the exchange rate can act as an effective shock absorber.
  - Reduce government debt and strengthen external positions to sustain investor confidence and borrowing capacity.
  - Implement policies to reduce energy imports (for example, improve energy efficiency) to limit exposure to energy price swings.
  - Promote greater financial integration and strengthen the global financial safety net to foster international risk sharing.
- For fossil fuel exporters facing the clean energy transition:
  - Facilitate reallocation of resources across sectors.
  - Active labor market policies: job search assistance and retraining for displaced workers.
  - Structural reforms to enable private sector response and growth in less carbon-intensive and green sectors.
- For critical mineral exporters:
  - Improve fiscal capacity to prudently manage windfalls from higher commodity exports.
  - Reduce structural barriers to promote economic diversification and mitigate resource curse risks.

### Emerging challenges: US dollar–oil price correlation and clean energy transition
- Change in correlation:
  - The correlation between the oil price and the US dollar turned positive since 2020 after about two decades of being stable and negative.
  - The rolling correlation is illustrated with a 36-month window spanning from January 2000 to May 2023.
  - Contributing factors discussed:
    - The United States shifting to a net exporter of oil since early 2020.
    - The BAA spread and global risk aversion.
    - Increased foreign investor purchases of US assets following oil price increases since 2020.
- Implications if positive correlation persists:
  - Dollar-pegging oil exporters: currency appreciation with oil price increases can help cool domestic economy and reduce need for fiscal tightening; reverse operates when oil prices fall.
  - Countries with sovereign wealth funds long on the US dollar: valuation changes of external wealth move with oil prices, increasing the cost (in US dollar terms) of fiscal stimulus when oil price falls.
  - Net oil importers with floating exchange rates: positive correlation amplifies terms-of-trade shocks due to simultaneous rising oil prices and weaker local currency; may require tighter monetary policy and face larger output losses where second-round inflation effects are large.
  - Net oil importers with net short US dollar exposure on balance sheets: depreciation raises the cost of servicing foreign-currency liabilities, increasing financial stability risks.
- Clean energy transition:
  - Transition requires large reductions in fossil fuel production and consumption to limit global temperature increases below 2 degrees Celsius by 2050.
  - Transition will boost demand for critical metals such as copper, nickel, cobalt, and lithium.
  - Stylized modeling treats the transition as a permanent change in relative prices: lower relative price of fossil fuels and higher relative price of critical metals.
  - Expected macro patterns:
    - Fossil fuel exporters: initially stronger current account balances followed by gradually weakening economic performance.
    - Critical metal exporters: opposite pattern—initial gains could be sustained by higher demand and prices.
  - Policy needs:
    - Fossil fuel exporters: facilitate resource and labor reallocation, active labor market policies, structural reforms to encourage diversification.
    - Critical mineral exporters: strengthen fiscal management of windfalls and implement structural policies to avoid resource curse dynamics.

### Key statistics and illustrative figures from the European energy price episode
- Wholesale price peaks in August 2022 (compared to 2019–21 average):
  - Natural gas: 1,100 percent.
  - Coal: 600 percent.
  - Electricity: 1,600 percent.
- For electricity in 2021, taxes and charges as share of retail prices:
  - United Kingdom: 4 percent of retail prices.
  - Germany: 48 percent of retail prices.

*Source: ch2 - 1. Real Oil Prices, IMF staff calculations, chapter content.*

### 1. Manufacturing (aggregate), 2000–22

### ch2 - 1. Manufacturing (aggregate), 2000–22

### Energy cost increases and sectoral heterogeneity
- Energy cost in European countries increased by 3 percentage points on average in 2022 from 7 percent of the gross value added in 2021.
- Natural gas and electricity prices were the main drivers given their high share in the manufacturing energy mix; together they account for 70 and 80 percent of energy consumed by manufacturing sectors in France and Germany, respectively.
- Large heterogeneity across manufacturing subsectors and countries:
  - Basic metals production (high energy intensity) incurs energy costs amounting to 60 to 70 percent of gross value added.
  - The German manufacturing sector experienced the largest increase (pretax) in energy costs; the smallest increase was observed in France.
- Despite the much larger energy price increase in Europe, the average increase in manufacturing sector energy costs is broadly comparable with that of other non-EU countries.

### Role of taxes and government interventions
- Historically, taxes account for a sizable share of the increase in the energy cost incurred by European manufacturing firms:
  - In 2021, taxes and fees ranged between 4 percent (United Kingdom) and 40 percent (Germany) of the total energy cost.
  - These values reduced to 3 to 10 percent in 2022–23 as governments reduced taxes and introduced other mechanisms to help manufacturing sectors cope with increased energy prices.
- Government interventions and reductions in taxes alleviated the burden on manufacturing firms, attenuating the overall impact.
- Caveat: The fiscal measures provided important short-term relief, but—if sustained—would reduce firms’ incentives to improve their energy efficiency.

### Principal components analysis of commodity price co-movements (1980–2023)
- Data and method:
  - PCA of 39 monthly real commodity prices over the period from 1980 to 2023.
  - Exclusions: natural gas (not available before 1992); coal (not available before 1990); fish meals (not available after 2018).
- Key results:
  - The first component explains 40 percent of the variance of commodity prices; the first two components explain 60 percent.
  - This result holds across commodity subgroups (food versus other commodities) and over subperiods; no trend increase in co-movement over time is found for the whole sample.
- Correlations of the first principal component:
  - Energy prices: 0.79 on average.
  - Metals prices: 0.74 on average.
  - Food prices: 0.50 on average.
- Drivers of co-movement identified:
  - Energy is a crucial input for production and transportation; oil, natural gas, and coal represent around 80 percent of total energy consumption at the global level.
  - Substitution effects between similar commodities (for example, oil and natural gas; wheat and corn); competition between uses (for example, land for food versus bio-fuel).
  - Common drivers such as global activities and demand (for example, China’s demand).
  - Financialization and index investment increasing correlation across commodities included in indices.

### Evolving correlation between the US dollar and oil price
- Historical pattern:
  - From the 1970s to the 1990s, the correlation alternated between positive and negative signs.
  - Since the 2000s, the correlation remained negative for two decades (a rise in oil prices coincided with a depreciation of the US dollar) until shifting to positive since the early 2020s.
- Empirical approach:
  - Monthly data from January 1975 to May 2023.
  - Response of the US dollar to four structural shocks (Baumeister and Hamilton 2019): oil supply shocks, oil consumption demand shocks, oil inventory demand shocks, and global economic activity shocks, estimated on a rolling sample with a 36-month window.
- Findings by correlation regime:
  - During periods of positive correlation between the US dollar and the oil price:
    - The US dollar appreciates in response to negative oil supply shocks that lead to an oil price increase.
    - The US dollar shows no significant response to the other three shocks.
  - During periods of negative correlation:
    - The US dollar depreciates in response to any of the four structural shocks that increase the oil price.
- Three potential contributing factors (not exclusive or exhaustive):
  1. The United States shifting from a net oil importer to a net exporter around early 2020, consistent with differential responses of exporter versus importer currencies to negative supply shocks.
  2. Bouts of high global risk aversion: during positive correlation periods the dollar appreciates less to negative oil supply shocks after controlling for global risk aversion (measured by residuals from regressing BAA spreads on US monetary policy shocks).
  3. Changes in foreign investors’ purchase of US assets: foreign net purchases turned from net sales to net purchases during periods of positive correlation, exerting upward pressure on the US dollar following negative oil supply shocks.

### Macroeconomic effects of an energy transition on commodity exporters
- Modeling setup:
  - Uses IMF’s Flexible System of Global Models (FSGM) and variants (G20MOD; FSGM for Latin America).
  - Energy transition simulated as a permanent 20 percent decline in the real price of oil and a permanent 20 percent increase in the real price of copper.
- Effects on fossil fuel (oil) exporters (G20MOD results, deviations from World Economic Outlook baseline):
  - Permanently lower oil prices reduce the return on capital, leading firms to cut investment sharply and for an extended period.
  - Firms cut demand for labor, reducing household income and consumption.
  - Central banks cut the interest rate to support the economy.
  - The real exchange rate depreciates, real exports of noncommodities improve, and real imports fall.
  - The large drop in investment implies an improvement in the current account balance, while output declines incrementally.
- Effects on metal (copper) exporters (Chile case, deviations from World Economic Outlook baseline):
  - Permanently higher copper prices trigger a large investment boom in the copper-producing industry.
  - Firms hire more workers, resulting in higher consumption and rising real output alongside the investment boom.
  - Central bank hikes interest rates and the real exchange rate appreciates.
  - The current account turns sharply negative driven by the investment boom and weaker real exports.

*Italic: Source: ch2 - 1. Manufacturing (aggregate), 2000–22, from the provided IMF chapter content.*

### 2. Real Private Investment

### 2. Real Private Investment

### Impulse response overview
- Source: IMF staff calculations.
- Note: The panels depict the impact of a permanent decline in real oil prices on a group of representative oil exporters.
- Figure referenced: Figure 2.4.1. Impulse Response to a Permanent Decline in Global Real Oil Prices in the Flexible System of Global Models.

### Real private investment (Percent difference from baseline)
- Vertical scale labels shown: –30, 5, –25, –20, –15, –10, –5, 0.
- Implication drawn by figure caption and note: a permanent decline in global real oil prices produces notable percent deviations of real private investment from baseline for representative oil exporters (negative values indicated down to –30 percent difference).

### Real effective exchange rate (Percent difference from baseline, + = appreciation)
- Vertical scale labels shown: –14, 2, –12, –10, –8, –6, –4, –2, 0.
- Implication drawn by figure caption and note: the shock leads to depreciation in the real effective exchange rate for representative oil exporters (negative percent differences from baseline are displayed).

### Current account balance to GDP (Percentage points difference from baseline)
- Vertical scale labels shown: 0.0, 2.5, 0.5, 1.0, 1.5, 2.0.
- Horizontal timing labels used in panels: t, t + 1, t + 2, t + 3, t + 4, t + 5, t + 6, t + 7.
- Implication drawn by figure caption and note: a permanent decline in real oil prices leads to positive percentage-point deviations in current account balance to GDP for representative oil exporters over the multi-year horizon indicated by t through t + 7.

### Key analytical takeaways (as implied by the figure and note)
- A sustained fall in global real oil prices is associated with:
  - A substantial negative percent deviation in real private investment relative to baseline (vertical axis range down to –30).
  - A depreciation of the real effective exchange rate (vertical axis range down to –14).
  - An improvement (increase) in current account balance to GDP measured in percentage points (vertical axis range up to 2.5) over the subsequent years t to t + 7.

*Source: IMF staff calculations (Figure 2.4.1 and accompanying note).*

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_Source: https://www.imf.org/-/media/files/publications/esr/2024/english/ch2.pdf_