COMMENTS ON TREASURY ANALYSES OF A 40% DROP IN THE PRICE OF OPEC OIL

Created: 1/27/1983

OCR scan of the original document, errors are possible

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Comments on Treasury Analysesrop in the Price of OPEC Oil

We have focused our attention on the two OASIA studies Impact on the World Macroeconomic Situation" and "Impact on the Energy Industry". He also have sorae comments on the paper entit.ed "Economic Impact on the Unitedut we have not attempted to make judgements on the study dealing with the effectil price on major US commercial banks.

Impact pn the World Macroeconomic Situation

lthough weomewhat different technique (that of formal econometric modeling) and differinor degreeesults, our assessment of the macroeconomic impact on the OECDil price is basically the same as that inT studv- Some Treasury estimates made at the time of tho studyre in need of revision. for instance, we now believe that increases in OECD oil production and further stock r

Jm!1' he rang,her thanement Treasury staff might well agree with at thia Juncture. In any event, this does no. cause our conclusions to differ materially from those of Treasury, as may be seen from the following table:

Effects on the OECDecline in OPEC Oil Prices

Change in Current Percent Change Change in Account Balance in Real CNP Inflation Rate (Billion Dollars)

Treasury Estimate-

CIA

Oil Study, Sectionage 11

" The Global Implicationsossible Price Decline,. (The current account figure was not published.)

approach and our's recognize that tha

snarphe oil price raises real incomes in the OECD which in turn causes higher real spending and output within existing

Yin turn reinforces the

ini.lal income effect, causing further positive repercussions on

spending and output. These effects take place both within

national economies and across borders through trade linkage*.

Sir

the Treasury study treats the initial andseparately for analytical purposes, we normally solvefor all effects simultaneously. Several years ago, whenwith our second generation linked model byoil price shock with and without the normal trade linkages,that the existence of the linkages added considerably toof the shock. If Treasury staff would find the resultswe could perform the same experiment on ourmodel.

Impact on the Energy Industry

too, we are in general agreement with thealthough again we may differ on minor points. Ifprice were to fall3 and remain" there forwe question whether Saudi Arabia would be able orraise outputS is that Riyadh is already reducing operating capacityto hold down ARAMCO expenditures. If prices declineinvestment outlays are further reduced, the erosioncould accelerate. In general, however, we agree thatmarket could tighten considerably in the years following anprice decline, as conservation weakens and globalstrengthens.

Economic Impact on the United States

Our chief concern in this study is the importance attached to the ratio of energy consumption to real CNP derived from work by Hudson and Jorgenson. Our difficulty is that the energy-CNP ratio changes over time; the Treasury report, however, assumes no change in the relationship following the oil price decline. This, in effect, assumes no change in the relative level of conservation.

In addition to this issue, we have difficulty following the links between the analysis and the numerical conclusions. The problem is most apparent in the first paragraph onhere an estimated impact on GNPercent is proferred, without indicating how it was derived.

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