Not All Energy Transitions Are Alike: Disentangling the Effects of Demand and Supply-Side Policies on Future Oil Prices

NotAllEnergyTransitionsAreAlike:DisentanglingtheEffectsofDemand-andSupply-SidePoliciesonFutureOilPrices LukasBoer,AndreaPescatoriandMartinStuermerWP/23/160 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2023 AUG ©2023InternationalMonetaryFundWP/23/160 IMFWorkingPaper ResearchDepartment NotAllEnergyTransitionsAreAlike: DisentanglingtheEffectsofDemand-andSupply-SidePoliciesonFutureOilPricesPreparedbyLukasBoer,AndreaPescatoriandMartinStuermer* AuthorizedfordistributionbyPetyaKoevaBrooks August2023 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Weusestructuralscenarioanalysistoshowthattheclimatepolicymix—supply-sideversusdemand-sidepolicies—canleadtodifferentoilpricepathswithdivergingdistributionalconsequencesinanet-zeroemissionsscenario.Whenemissionreductionisdrivenbydemand-sidepolicies,priceswoulddeclinetoaround25USDperbarrelin2030,benefitingconsumingcountries.Viceversa,supply-sideclimatepoliciesaimedatcurbingoilproductionwouldpushuppricestoabove130USDperbarrel,benefitingthoseproducingcountriesthattakethepoliticaldecisiontokeeponproducing.Consequently,itiswrongtoassumethatoilpriceswillnecessarilydeclineduetothecleanenergytransition.Aspoliciesaremostlyformulatedatthecountrylevelandhardtopredictatthegloballevel,thetransitionwillraiseuncertaintyaboutthepriceoutlook. lboer@imf.org,apescatori@imf.org,mstuermer@imf.org Author’sE-MailAddress: Conditionalforecasts;structuralvectorautoregression;structuralscenarioanalysis;energytransition;oilprices;climatechange. Keywords: *WearegratefultoChristianeBaumeister,LutzKilian,GregorSchwerhoffandChristophUngererforhelpfulsuggestionsandtoJuanAntolin-Diaz,JuanRubio-RamirezandIvanPetrellaforsharingtheircodewithus.WethankRachelBrasierandWenchuanDongforexcellentresearchassistance.TheviewsinthispaperarethoseoftheauthorsanddonotnecessarilyreflecttheviewsoftheInternationalMonetaryFund,itsExecutiveBoard,andIMFManagement. WORKINGPAPERS NotAllEnergyTransitionsAreAlike:DisentanglingtheEffectsofDemand-andSupply-SidePoliciesonFutureOilPrices PreparedbyLukasBoer,AndreaPescatori,andMartinStuermer 1Introduction Theeconomicliteraturehastypicallyassumedthatfossilfuelpriceswillbenegativelyaffectedbyclimatepolicies(seee.g.,NordhausandBoyer,2000,HasslerandKrusell,2012,vanderPloegandRezai,2020).Forexample,theInternationalEnergyAgency(2022)estimatesthatpriceswilldeclineasfossilfuelconsumptionfallsby60percentuntil2050inanet-zeroemissionsscenario.Theimplicitassumptionisthattheenergytransitionisdrivenbyaseriesofnegativefossil-fueldemandshocks.Subsidiestoelectriccars,forinstance,causenegativecrude-oilspecificdemandshocks,asoilissubstitutedwithelectricity,leadingtolowerprices. Thispapershowsthatadecliningglobalfossilfuelproductionpathcanalsoarisefromcurbingfossilfuelproduction(i.e.,fromnegativesupplyshocks),leadingtoincreasingoilpricesoverthelongterm.ThisisinlinewiththeoreticalmodelsbyHoel(1994)andHarstad(2012),whereoilpricescanincreaseinthefaceofsupply-sideclimatepolicies.Forexample,climateregulationmaydirectlyrestrictoilproductionwhilepublicpreferencesmayshiftinfavorofsustainableinvestment—thereby,increasingthecostofcapitalforfossilfuelscompaniesand,eventually,loweringoilsupply(Delisetal.,2019,Ehlersetal.,2022,Seltzeretal.,2022).Higherpolicyuncertaintycouldalsoleadtoadeclineinfossilfuelinvestment(Bogmansetal.,2023).Importantly,aspoliciesaremostlyformulatedatthecountrylevelandthemixbetweendemandsideandsupplysidepoliciesishardtopredictatthegloballevel,theenergytransitionraisesuncertaintyaboutthepriceoutlook. WeapplystructuralscenarioanalysisfollowingAntol´ın-D´ıazetal.(2021)tomodeltheimpactoftheenergytransitiononoilpricesasasequenceofeitheroil-specificdemandoroilsupplyshocks.Thederivedshockseriesmatchtheglobaloilconsumptionscenariosfrom2023to2030(andinanextensionto2050)fromtheInternationalEnergyAgency(2022).Inotherwords,ourstructuralapproachfindsseriesofshocksthatincentivizetheoilconsumptionandoutputpathsinlinewiththescenarios.Wethenderivetheimpliedscenariopricepaths.Modellingtheenergytransitioninthiswayhastheadvantagethatwecandistinguishamongstructuralsupplyanddemandshocks,whichhavesubstantiallydifferentimplicationsforprices. Wefindthatifweonlyconsiderdemand-sidepolicies,oilpricescoulddeclineto$25(inflation-adjusted)in2030.Thiswouldhavenegativeconsequencesforoilproducersasbothpricesandvolumeswoulddecline.Rentswoulddiminishandoilproductionwouldcomeunderpressureinhigh-costregionschangingitscurrentgeographicaldistributionandmovingtowardsamoreconcentratedmarket. Reductionsinoilproductionthataredrivenonlybysupply-sidemeasureswouldputstrongupwardpressurestakingpricestoroughly$130perbarrel.Thiswouldben