## csfapril2023 ## Source details **Canonical URL:** [csfapril2023](https://www.imf.org/-/media/files/research/commodityprices/weospecialfeature/csfapril2023.pdf) ## Other formats - [Markdown version](/-/media/files/research/commodityprices/weospecialfeature/csfapril2023.pdf.md) - [Structured JSON version](/-/media/files/research/commodityprices/weospecialfeature/csfapril2023.pdf.json) --- ### Commodity market developments - Primary commodity prices declined 28.2 percent between August 2022 and February 2023; the decrease was led by energy commodities, down 46.4 percent. - Base and precious metal prices rebounded by 19.7 percent and 3.3 percent, respectively; food prices increased by 1.9 percent. - Crude oil: - Crude oil prices retreated by 15.7 percent between August 2022 and February 2023. - Futures markets suggest crude oil prices will slide by 24.1 percent, to average $73.1 a barrel in 2023 (from $96.4 in 2022) and continue to fall to $65.4 in 2026. - Natural gas: - European natural gas prices at the Title Transfer Facility receded 76.1 percent from record highs in August 2022 to $16.7 a million British thermal units (MMBtus) in February 2023. - Prices reached nearly $100 a MMBtu in late August 2022 during the spike. - A price decline to historical averages is expected by 2028; risks of price spikes remain somewhat elevated for the following winter. - Coal: coal prices slid 50.9 percent over the reference period. - Metals and commodities: - The IMF’s energy transition metal index increased 14.3 percent. - Gold prices rose by 5.1 percent; central banks’ net purchases broke a 55-year record. - Base metal price index projected to increase 3.5 percent in 2023 and then decrease 2.6 percent in 2024. - Food and agricultural materials: - Food and beverage prices peaked in May 2022 and are up 1.3 percent from last August; they remain 22.3 percent above the past-five-year average and 39.1 percent above pre-pandemic levels. - Prices of raw agricultural materials declined by 9.1 percent from last August. ### Drivers of recent commodity price movements - Demand-side factors: - Slowing global economy weakened oil demand; China experienced its first annual decline in oil consumption this century. - Recession fears, higher-than-expected inflation, tighter monetary policy, and banking sector stress weighed on demand. - Supply-side and policy factors: - Uncertainty over effects of Western sanctions on Russian crude exports; Russian exports held steady after the G7 price cap and ban on crude oil imports implemented December 5, with rerouting to nonsanctioning countries reportedly at major discounts. - Sizable releases of strategic petroleum reserves by OECD members helped keep oil markets well supplied. - For gas, reduced Russian pipeline supplies (roughly 80 percent shutdown at peak) were offset by higher LNG imports, lower gas demand, mild winter, and high storage levels in Europe. ### Countries depending on fossil fuel output - Between 2010 and 2019, average oil and gas production-to-GDP ratios were large in countries such as Angola, Azerbaijan, the Republic of Congo, Kuwait, and Saudi Arabia; gas production is particularly relevant in Qatar and Trinidad and Tobago. - Ratios of net exports of oil and gas to GDP surpassed 25 percent on average over 2010–2019 in more than ten countries. - Coal production is less relevant to GDP at the country level, except in Mongolia. ### Data and identification of extraction-decline episodes - New data set: extraction of oil, coal, gas, and metals for countries worldwide from 1950 to 2020. - Identification: - Out of 154 observed episodes, 35 episodes involving persistent declines in extractive activity are identified. - Episodes selected are driven by factors exogenous to economic conditions (for example, depletion or sector-specific policy changes); episodes driven by global recessions, broad policy decisions affecting other sectors, and structural transitions (breakup of the Soviet Union, civil wars) are excluded. - Typical episode profile: - A typical episode is a 10 percent contraction in extraction activity in the episode’s first year that cumulates to a 40 percent reduction over 10 years. ### Estimation approach - Local projections (following Jordà 2005) estimate effects of exogenous extraction declines on real GDP and external and domestic sectors. - Regression controls include country fixed effects, time fixed effects, three lags of the dependent variable, and a shock series to address autocorrelation. - Outcomes are interpreted as cumulative percentage changes from baseline to shock in year t, over horizons up to 10 years. ### Negative macroeconomic effects of extraction declines (empirical findings) - Real GDP: - A typical extraction-decline episode leads to a 1 percent initial decline from the baseline in real GDP, cumulating to 5 percent after five years. - The decline is persistent with no rebound through the 10-year horizon. - External sector and real exchange rate: - Real exchange rate depreciates slowly by 20 percent. - Trade balance worsens, driven by a decline in exports of about 6 percent. - Imports and investment also decline, though estimates for these are less precise. - Consumption and investment: - Aggregate consumption responds only with a lag of more than five years. - Sectoral spillovers: - Manufacturing and services value added fall significantly; manufacturing value added falls by about 5 percent. - Spillovers from declines in extraction more than offset potential benefits from real exchange rate depreciation. - Employment impact is small, likely reflecting high capital intensity of extraction sectors. ### Role of manufacturing and initial conditions - Economies with larger initial manufacturing shares fare better following extraction declines, suggesting sunk costs in tradables and advantages for existing exporting manufacturing firms. - Where the manufacturing sector is small, negative effects are larger. ### Role of institutions - The estimated GDP impact is significantly larger for middle- and low-income countries than for high-income countries. - Five years after the shock, the GDP difference between countries with high and low institutional quality is about 5 percentage points. - A decline in extraction activity does not restore the quality of institutions within a decade after the shock, indicating hysteresis and asymmetric institutional responses. ### Anticipation and robustness considerations - Anticipation of extraction declines could bias estimated impacts downward if earlier adjustments occur; the analysis compares IMF Article IV projections with actual production for episodes with coverage to explore anticipation. - The analysis restricts episodes to those plausibly exogenous to contemporaneous economic conditions to mitigate endogeneity. - Empirical context: - Only 4 were anticipated. In the other 22, extraction was expected either to increase or to remain stable (or in a few cases, it was not mentioned). - The lack of anticipation suggests uncertainty about the size and persistence of the ensuing contraction may have delayed the economic adjustment needed, surprising the country’s policymakers and private sector alike. - Both private and public consumption initially increase, declining only with a delay to a 4 percent lower level. - The exchange rate moves in only a modest and statistically nonsignificant way. ### Policy implications and recommended actions for countries facing declining fossil fuel output - Improve public finances and the quality of institutions (for example, by enhancing the management of public sector institutions and the regulatory business environment). - Diversify economies (Cherif and others 2022). - Set up sovereign wealth funds. - Facilitate the reallocation of production factors. - Possible policies to accomplish these goals include: - Ameliorating the business environment to attract investment in new, productive, higher-value-added sectors. - Modernizing infrastructure and attracting foreign direct investment in research and development. - Improving the human capital stock of the labor force by investing in education. ### Uncertainty from the pace and direction of the clean energy transition - The pace and direction of the clean energy transition as well as the price outlook depend on the policy mix. This creates great uncertainty in countries that produce fossil fuels. - If fossil fuel prices decline because of a climate policy mix that works mostly through the demand side, high-cost producers will need to shut down production. - If fossil fuel prices instead rise based on a climate policy mix that relies on supply cuts, local production declines will depend on domestic policy decisions. - Climate policy certainty, at the country and global levels, could make adjustments more predictable and less costly. *Source: IMF — Commodity Special Feature: Market Developments and the Macroeconomic Impact of Declines in Fossil Fuel Extraction (Sections 1–2).* ### Section 1 ### csfapril2023 - Section 1 ### Commodity market developments - Primary commodity prices declined 28.2 percent between August 2022 and February 2023; the decrease was led by energy commodities, down 46.4 percent. - Base and precious metal prices rebounded by 19.7 percent and 3.3 percent, respectively; food prices increased by 1.9 percent. - Crude oil: - Crude oil prices retreated by 15.7 percent between August 2022 and February 2023. - Futures markets suggest crude oil prices will slide by 24.1 percent, to average $73.1 a barrel in 2023 (from $96.4 in 2022) and continue to fall to $65.4 in 2026. - Natural gas: - European natural gas prices at the Title Transfer Facility receded 76.1 percent from record highs in August 2022 to $16.7 a million British thermal units (MMBtus) in February 2023. - Prices reached nearly $100 a MMBtu in late August 2022 during the spike. - A price decline to historical averages is expected by 2028; risks of price spikes remain somewhat elevated for the following winter. - Coal: coal prices slid 50.9 percent over the reference period. - Metals and commodities: - The IMF’s energy transition metal index increased 14.3 percent. - Gold prices rose by 5.1 percent; central banks’ net purchases broke a 55-year record. - Base metal price index projected to increase 3.5 percent in 2023 and then decrease 2.6 percent in 2024. - Food and agricultural materials: - Food and beverage prices peaked in May 2022 and are up 1.3 percent from last August; they remain 22.3 percent above the past-five-year average and 39.1 percent above pre-pandemic levels. - Prices of raw agricultural materials declined by 9.1 percent from last August. ### Drivers of recent commodity price movements - Demand-side factors: - Slowing global economy weakened oil demand; China experienced its first annual decline in oil consumption this century. - Recession fears, higher-than-expected inflation, tighter monetary policy, and banking sector stress weighed on demand. - Supply-side and policy factors: - Uncertainty over effects of Western sanctions on Russian crude exports; Russian exports held steady after the G7 price cap and ban on crude oil imports implemented December 5, with rerouting to nonsanctioning countries reportedly at major discounts. - Sizable releases of strategic petroleum reserves by OECD members helped keep oil markets well supplied. - For gas, reduced Russian pipeline supplies (roughly 80 percent shutdown at peak) were offset by higher LNG imports, lower gas demand, mild winter, and high storage levels in Europe. ### Countries depending on fossil fuel output - Between 2010 and 2019, average oil and gas production-to-GDP ratios were large in countries such as Angola, Azerbaijan, the Republic of Congo, Kuwait, and Saudi Arabia; gas production is particularly relevant in Qatar and Trinidad and Tobago. - Ratios of net exports of oil and gas to GDP surpassed 25 percent on average over 2010–2019 in more than ten countries. - Coal production is less relevant to GDP at the country level, except in Mongolia. ### Data and identification of extraction-decline episodes - New data set: extraction of oil, coal, gas, and metals for countries worldwide from 1950 to 2020. - Identification: - Out of 154 observed episodes, 35 episodes involving persistent declines in extractive activity are identified. - Episodes selected are driven by factors exogenous to economic conditions (for example, depletion or sector-specific policy changes); episodes driven by global recessions, broad policy decisions affecting other sectors, and structural transitions (breakup of the Soviet Union, civil wars) are excluded. - Typical episode profile: - A typical episode is a 10 percent contraction in extraction activity in the episode’s first year that cumulates to a 40 percent reduction over 10 years. ### Estimation approach - Local projections (following Jordà 2005) estimate effects of exogenous extraction declines on real GDP and external and domestic sectors. - Regression controls include country fixed effects, time fixed effects, three lags of the dependent variable, and a shock series to address autocorrelation. - Outcomes are interpreted as cumulative percentage changes from baseline to shock in year t, over horizons up to 10 years. ### Negative macroeconomic effects of extraction declines (empirical findings) - Real GDP: - A typical extraction-decline episode leads to a 1 percent initial decline from the baseline in real GDP, cumulating to 5 percent after five years. - The decline is persistent with no rebound through the 10-year horizon. - External sector and real exchange rate: - Real exchange rate depreciates slowly by 20 percent. - Trade balance worsens, driven by a decline in exports of about 6 percent. - Imports and investment also decline, though estimates for these are less precise. - Consumption and investment: - Aggregate consumption responds only with a lag of more than five years. - Sectoral spillovers: - Manufacturing and services value added fall significantly; manufacturing value added falls by about 5 percent. - Spillovers from declines in extraction more than offset potential benefits from real exchange rate depreciation. - Employment impact is small, likely reflecting high capital intensity of extraction sectors. ### Role of manufacturing and initial conditions - Economies with larger initial manufacturing shares fare better following extraction declines, suggesting sunk costs in tradables and advantages for existing exporting manufacturing firms. - Where the manufacturing sector is small, negative effects are larger. ### Role of institutions - The estimated GDP impact is significantly larger for middle- and low-income countries than for high-income countries. - Five years after the shock, the GDP difference between countries with high and low institutional quality is about 5 percentage points. - A decline in extraction activity does not restore the quality of institutions within a decade after the shock, indicating hysteresis and asymmetric institutional responses. ### Anticipation and robustness considerations - Anticipation of extraction declines could bias estimated impacts downward if earlier adjustments occur; the analysis compares IMF Article IV projections with actual production for episodes with coverage to explore anticipation. - The analysis restricts episodes to those plausibly exogenous to contemporaneous economic conditions to mitigate endogeneity. *Source: IMF — Commodity Special Feature: Market Developments and the Macroeconomic Impact of Declines in Fossil Fuel Extraction (Section 1).* ### Section 2 ### csfapril2023 - Section 2 ### Figure note and empirical context - Figure 1.SF.7. Response of Institutional Quality Interacted with Manufacturing Sector Size to an Extraction Decline Shock (Percent). - Note: The unit of the x-axis is years after the shock. Shaded areas represent 90 percent confidence intervals. ### Empirical findings on extraction-decline shocks and macroeconomic responses - Only 4 were anticipated. In the other 22, extraction was expected either to increase or to remain stable (or in a few cases, it was not mentioned). - The lack of anticipation suggests uncertainty about the size and persistence of the ensuing contraction may have delayed the economic adjustment needed, surprising the country’s policymakers and private sector alike. - Both private and public consumption initially increase, declining only with a delay to a 4 percent lower level. - The exchange rate moves in only a modest and statistically nonsignificant way. ### Policy implications and recommended actions for countries facing declining fossil fuel output - Improve public finances and the quality of institutions (for example, by enhancing the management of public sector institutions and the regulatory business environment). - Diversify economies (Cherif and others 2022). - Set up sovereign wealth funds. - Facilitate the reallocation of production factors. - Possible policies to accomplish these goals include: - Ameliorating the business environment to attract investment in new, productive, higher-value-added sectors. - Modernizing infrastructure and attracting foreign direct investment in research and development. - Improving the human capital stock of the labor force by investing in education. ### Uncertainty from the pace and direction of the clean energy transition - The pace and direction of the clean energy transition as well as the price outlook depend on the policy mix. This creates great uncertainty in countries that produce fossil fuels. - If fossil fuel prices decline because of a climate policy mix that works mostly through the demand side, high-cost producers will need to shut down production. - If fossil fuel prices instead rise based on a climate policy mix that relies on supply cuts, local production declines will depend on domestic policy decisions. - Climate policy certainty, at the country and global levels, could make adjustments more predictable and less costly. *Source: https://www.imf.org/-/media/files/research/commodityprices/weospecialfeature/csfapril2023.pdf — csfapril2023 - Section 2.* --- _Source: https://www.imf.org/-/media/files/research/commodityprices/weospecialfeature/csfapril2023.pdf_