Energy, International Trade, SWP-474 and Economic Growth 6FLiRARY World Bank Staff Working Paper No. 474 August 1981 SECTORAL lIBRARY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT APR 21 1987 ** HD9W102 A2 M36 1981 c.2 Energ9, international trade, and economic growth. IlllllllllllllllllllilIlIll HDIIII I ID I SLC03057 1 -With the assistance of Sehun Kim [Consultantsl Development Policy Staff fi * Spyright (D 1981 D! le World Bank 502 18 H Street, N.W. A)2 ashington, D.C. 20433, U.S.A. 2 6 981 re views and interpretations in this document are those of the author 2 Id should not be attributed to the World Bank, to its affiliated _ganizatrons, or to any individual acting in their behalf. N ri -z - CN IA II A;a 5794C M.3 *Lne views and interpretations in this document are those of the uthor and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting on their behalf. w ,rr s 1-bTY Of WORLD BANK E,.'`RGY Staff Working Paper No. 474 L,BRARY August 1981 ! B. ___ ENERGY, INTERNATIONAL TRADE, AND ECONOMIC GROWTH A Background Study for World Development Report 1981 This paper is designed to complement the work that is now ongoing in connection with the World Bank (IBRD)'s World Development Report 1981 (horeafter abbreviated WDR IV). Results will be reported from a small-scale in:ernational trade model that is focused on issues related to energy and economic growth. The analysis is intended to provide some broad orders of magnitude as a cross-check upon detailed country-by-country projections but is not to be viewed as a substitute for these "bottom-up" analyses. Our model is compact enough so that all numerical results (and virtually all input as:;umptions) can fit onto a single sheet of paper. This also facilitates a ra?id turnaround in response to changes in input assumptions. The numerical results here are based upon the WDR IV guidelines available in November 19.30. In the following pages, we will review the economic assumptions th.zt underlie the model, and will then present nine alternative cases - varying the assumptions with respect to energy supplies, demands, economic grDwth, and capital flows. Half of these cases imply much the same price scenario as specified in the current set of WDR IV guidelines - a 3% annual real oil price increase between 1980 and 1990. It will be shown, however, that relatively small differences in supplies - and relatively small differences in the ease of demand adjustments to rising prices - can lead to 100% differences in the energy prices projected for 1990. Prepared by: Alan S. 9Pne, with the assistance of Sehun Kim (Department of Operations Research, Stanford University) Consultants Development Policy Staff Ccpyright g 1981 The World Bank 1818 H Street, N.W. Washington, D.C. 20433 U.S.A. Contents Page 1. Introduction ......................................... 1 2. General Background ........................................... 2 3. The Basic Simplifications .. 3 4. Macroeconomic Assumptions and Energy Supplies ............... 6 5. Energy Demands -- The Adjustment Problem ................... 7 6. International Trade and Capital Flows . . 10 7. Numerical Results .......................................... 12 8. A Postscript on "Low GDP Growth .."........................... 15 Appendix A. Model Formulation . .................................. 17 Appendix B. Nine Alternative Projections .................... ... 20 References ..................................................... 30 Tables and Figures Tables 1. Alternative energy supply projections for three-region model, 1990 .............................7 2. Alternative projections of oil prices, GDP growth rates, and merchandise trade . ....................... 12a Figures 1. Oil prices and GDP growth rates, region 3 ................. 12b 2. Energy Modeling Forum (EMF) world oil price projections, reference case ......................... 14a Acronyms and Abbreviations CES Constant elasticity of substitution EIA U.S. Energy Information Administration EMF Energy Modeling Forum (Stanford University) EPDCE Economic Analysis and Projections Department (IBRD) Commodities and Exports Projections IBRD International Bank for Reconstruction and Development (World Bank) MBD Million barrels daily, oil equivalent OECD Organisation for Economic Co-operation and Development OPEC Organization of Oil-Exporting Countries SITC Standard International Trade Classification WAES Workshop on Alternative Energy Strategies WDR IV World Development Report 1981 1. Introduction Despite the volatility of energy prices, the GDP growth rates of the industrialized countries do not vary widely. Imported energy still remains a relatively small fraction of their GDP, and growth appears largely determined by the underlying assumptions with respect to the productivity of capital and labor. Even a 100% difference in energy prices leads to a difference of only 0.3% in the annual gross domestic product (GDP) growth rates of these coun- tries between 1978 and 1990. At first glance, this appears a counter-intuitive result - and quite different from the conventional wisdom expressed in news- paper headlines and editorial pages. Our analysis does not, however, refer to short-term political and military disruptions, but to medium-term economic trends. With a decade for energy demands and trade flows to adjust to higher prices, there is room for guarded optimism that energy constraints will not be the principal determinant of the industrialized countries growth during the 1980s. For the oil-importing developing countries, the outlook is more pJroblematic. During the 1970s, they succeeded in financing their oil deficits tirough an unprecedented inflow of capital. If there are even larger capital i:flows to compensate for the likely rise in oil prices during the 1980s, the daveloping countries may be able to achieve the growth targets outlined in WDrld Bank (1981; World Development Report 1981, hereafter cited as WDR IV). Without such flows, the outlook is considerably bleaker. A 100% rise in energy prices would then have a major impact upon their terms of trade, and it could'reduce their GDP growth rates by as much,as 1.1% per year. -2- 2. General Background Although the developing countries now consume a relatively small fraction of the world's energy, this fraction could grow rapidly over the coming decades. In comparison with the industrialized nations, the developing countries have high population growth rates and high income elasticities of demand for commercial energy. Moreover, if today's North-South income dis- parities are to be reduced, the developing countries' per capita incomes will have to grow more rapidly. Taken together, these factors imply a substantial increase in their demand for energy. For example, the Workshop in Alternative Energy Strategies (WAES) study (Wilson 1977, p. 269) projected that the developing countries' share of the world's commercial energy consumption would grow from 15% in 1972 to 25% in the year 2000. Meanwhile, the principal consumers of energy are the industrialized countries. Their imports - and OPEC's readiness to expand production - are the principal determinants of international oil prices. In view of the price increases experienced since 1973, it is quite likely that the oil-exporting developing countries will continue to enjoy a rapid increase in GDP, and will consume ever-increasing amounts of their own energy production. The oil-importing developing countries, however, consti- tute a far more populous group, and their energy demand projections appear quite uncertain. With sluggish growth in traditional export markets among the industrialized nations, the oil importers are likely to encounter chronic balance-of-payments difficulties. Their prospective trade deficits cannot easily be offset by official development assistance or by private capital flows. - 3 - In qualitative terms, it is easy enough to arrive at these generali- zaLtions. But what about their quantitative effects? To what extent is energy l:kely to impose constraints upon economic growth? For this purpose, it appears essential to construct a computable model of international trade. One region's export prospects cannot be assessed without an understanding of the inlports of non-energy products to other nations. The ease or difficulty of this adjustment process wiLl be governed largely by the elasticities of substitution in energy and in international trade. 3. The Basic Simplifications These are the general considerations that have led to the specific approach taken here - a three-region general equilibrium model. This is not intended for general-purpose analysis of international trade and macroeconomic fluctuations. It is not designed to deal with individual commodities outside the energy sector - hence it is inappropriate for policy issues such as cDmparative advantage and tariff and non-tariff barriers to trade. For these purposes, one would need far more disaggregation than that adopted here (see Ginsburgh and Waelbroeck 1975 and Whalley 1980). As in these more detailed trade analyses, we shall construct a "snap shot" view (comparative statics) for a single point of time, 1990. There will be no attempt to analyze the year-by-year details of the transition from 1978 (the data benchmark year) to 1990. This is a "surprise-free" scenario. Aggregating the nineteen individual regions distinguished within WDR IV, we arrived at the following three-region classification of the market economies: - 4 - 1. industrialized countries (region 17; the major OECD nations) 2. oil-exporting developing countries (regions 10-16; primarily OPEC + Mexico) 3. oil-importing developing countries (regions 1-9). This model is not addressed to East-West trade issues. In effect, we assume zero net trade in energy with the centrally planned economies (regions 18, 19). This is closely consistent with other WDR IV projections. Following in the tradition of Armington (1969), Barten (1971), Hickman, Kuroda, and Lau (1979), and Hickman and Lau (1973), non-energy tradeables are aggregated in dollar terms but distinguished by their region of origin. Energy forms are expressed in terms of their oil equivalents. Thus, there are only four internationally traded goods whose prices are to be determined: energy plus one composite non-energy export product for each of the three regions. All prices are to be viewed as c.i.f.. Because of base-year data limitations, we shall project merchandise trade flows only. Both an optimistic and pessimistic view will be explored with respect to energy supplies. In both cases, these will be taken as exogenous data for each region in 1990. This "bean counting" approach appears more practical than attempting to estimate price-responsive supply curves. Over the next decade, the industrialized nations domestic supplies appear far less dependent upon future prices than upon institutional and public acceptability factors; e.g., petroleum leasing policies, environmental constraints upon air quality, and neclear safety regulations. Institutional and political factors also have a major impact upon the supplies likely to be available in the developing nations. - 5 - In order to project each region's demand for energy and for non- energy imports, we employ nested constant-elasticity-of-substitution (CES) p:roduction functions. With a CES production function, there are diminishing marginal returns from imports into each region. To this extent, the model ailtomatically allows for "absorptive capacity" constraints within the rapidly growing economies of the oil exporters (see Ezzati 1978). Each region's future endowments of capital and labor enter into its iadividual production function. These endowments are estimated in accordance with the region's potential GDP growth rates under constant prices of energy aad non-energy items. Each region views these international prices as a datum. To the extent that OPEC exerts monopoly power, this is already incor- porated in the assumptions with respect to the quantities of energy supplied by region 2 (OPEC + Mexico). Prices are projected so as to equilibrate 1990 supplies and demands. Given the prices of the internationally tradeable goods - and given the pro- duction functions together with each region's capital, labor, and energy re- sources - it is supposed that each region will choose a mix of energy and of non-energy imports so as to maximize its GDP. The maximization is subject to region-by-region constraints upon the balance of merchandise trade. The cutcome of this process is termed the realized GDP. This may exceed or fall below the potential GDP - depending upon whether there is an improvement or a deterioration in the international terms of trade. For technical details on the three-region model, see Appendix A and lhe dissertation of S. Kim (Stanford University, forthcoming). - 6 - 4. Macroeconomic Assumptions and Energy Supplies Potential GDP growth rates are a key input to the three-region model. These growth rates may be interpreted as an index number of capital and labor inputs - provided that the labor force is expressed in "efficiency units" to allow for productivity growth. One approximation should be noted. In effect, we are assuming that the growth of domestic capital stocks will not be significantly affected by oil price increases or by other changes in the terms of trade. For 1990, side calculations suggest that this feedback effect is minor. Over a longer time horizon, however, we would need an intertemporal model to allow properly for this savings and investment process. For the "high GDP" cases reported here, the 1978-90 potential growth rates are identical to those being employed elsewhere in WDR IV: 3.5% for the industrialized countries, 6.4% for the oil exporters, and 5.3% for the oil- importing developing countries. In general, the realized growth rates turn out to be lower for the oil importers and higher for the exporters. This is an immediate consequence of the rise in energy prices projected between 1978 and 1990. Two alternatives will be considered with respect to the commercial energy supplies available to the market economies in 1990: 122 and 114 million barrels daily, oil equivalent (MBD). From Table 1, note that 122 MBD is broadly consistent with the WDR IV guidelines, but that 114 MBD represents a more pessimistic asessment of the supply prospects within the developing countries. With a continuation of military and political disturbances in the Middle East, it is quite possible that there could be a 5 MBD shortfall in region 2. Similarly, there could be a 3 MBD shortfall in region 3 if energy development is not pursued aggressively there. Note that the 122 and 114 MBD - 7 - cases bracket the 116 MBD "mid-price" scenario released in October 1980 by the U.S. Energy Information Administration (EIA; 1980, p. 4). All these estimates lie well below the earlier ones made by the EIA, IBRD, and other organizations. The overthrow of the Shah of Iran - and the anti-nuclear fallout from the reactor accident at Three Mile Island, Pennsylvania - have led to drastic downward revisions since 1978. TABLE 1. Alternative energy supply projections for three-region model, 1990 (MBD: million barrels daily oil equivalent) Region 1: Region 2: Region 3: Total, Industrialized Oil-exporting Oil-importing regions Item countries developing developing 1-3 countries countries IBRD, EPDCE,a! October 29, 1980 64.3 47.0 14.7 126.0 Cases 1, 3, 5, 7, 9 b/ 62.3 45.0 14.7 122.0 Cases 2, 4, 6, 8: 5 MBD shortfall in region 2 and 3 MBD shortfall in region 3 62.3 40.0 11.7 114.0 1978 actual supplies 46.9 35.9 6.8 89.6 a/ Economic Analysis and Projections Department Commodities and Exports Projections. b/ Cases are defined, and more detailed data given, in Appendix B. 5. Energy Demands - The Adjustment Problem Energy demands depend both upon price and income elasticities. These runs have been based on the following GDP elasticities of demand for commercial energy: 1.0 in region 1; 1.3 in regions 2 and 3 for 1978, but declining thereafter. That is, at constant energy prices and other terms of trade, each 1.0% increase in GDP will lead to an increase of 1.0% in energy demands in region 1; and an increase of 1.3% in regions 2 and 3. These GDP elasticities seem inconsistent with time series and also multi-country econo- metric estimates made both before and after the oil price increases of 1973 (Blitzer, Choe, and Lambertini 1979, p. 55). But energy prices have not been constant during the past decade, and they are likely to rise still further during the l980s. What clues on price elasticities can we gather from the post-1973 experience with higher energy prices? At the time this report went to press, satisfactory data were available only for the industrialized countries. Between 1970 and 1978, c.i.f. oil prices had tripled (in dollars of constant purchasing power). Over the same period, real GDP increased by 3.5% per year, and energy consumption increased at a 2.0% annual rate. To some extent, we have already observed a decoupling between energy consumption and economic growth. For the industrialized countries between 1970 and 1978, the conven- tionally measured "income elasticity of demand for energy" was 2.0/3.5 = 0.57. But this calculation tells us little or nothing about long-term price elasti- cities of demand - or about the prospects for further adjustments of energy demands to higher prices. If we assume that all of the adjustments to the tripling in oil prices had already occurred by 197B, the implied long-term pride elasticities are quite low. Conversely, if we assume that only 25% of the long-term adjustment had occurred by 1978, the implied long-term price elasti- city of demand for primary coummercial energy is 0.27 (in absolute terms). This view of adjustment - plus multi-country cross-section econometric studies - has led the Energy Modeling Forum (EMF) to specify 0.40 as the long-term price elasticity of demand for primary energy. (This 0.40 value is specified - 9 - for the EMF's reference case - and for most of the other scenarios currently being analyzed in the World Oil Study.) If this view is correct, the after- effects of the 1970-78 price increase will continue to help decouple energy consumption from GDP growth during the 1980s. Further assistance will be piovided by the 1978-80 price shock - and by the cumulative impact of the real price increases projected post-1980. For the developing countries, there have been only a handful of systematic studies of demand growth since the 1973 price rise. Some clues may be obtained from the following comparison between two time periods: 1960-70 and 1970-78. Dunkerley and Matsuba (1980) have calculated that the conven- t-onally measured "energy/GNP [gross national product] elasticity" dropped (f:rom 1.29 to 0.94) for the oil importers, and that it rose (from 1.04 to 1.46) for the oil exporters between the 1960s and the 1970s. The decline for the importers would be roughly consistent with the price elasticities estimated by Blitzer, Choe, and Lambertini (1979). The rise for the exporters is counter- iatuitive, but it may be related to the fact that many of them held their dDmestic energy prices well below international levels during the 1970s. This stimulated domestic demands and also helped attract energy-intensive industries away from traditional locations. What follows from all this? On the basis of the actual experience letween 1970 and 1978, we cannot be at all certain whether energy demand adjustments will be easy or difficult. The key uncertainty appears to be the civersity in opinions on how long it takes for energy demands to respond to Irising prices. With the CES production functions employed in the three-region model, energy demand adjustments are specified quantitatively through "elasticities of - 10 - substitution." These are medium-term elasticities for 1990, and therefore lie below the long-term price elasticities of demand for primary energy. In order to achieve comparability with the current set of WDR IV energy demand projec- tions, we have had to adopt rather low values for the 1990 elasticity of substitution between energy and other productive inputs. This will be termed a "difficult" view of the adjustment process. In contrast, when we employ the elasticities corresponding to an "easy" view, the results for the industri- alized countries check quite closely with those in the EMF's reference case. It is assumed that the 1990 energy substitution elasticities will vary by region as follows: Difficult Easy adjustment adjustment Region 1: industrialized countries .15 .20 Region 2: oil-exporting developing countries .10 .10 Region 3: oil-importing developing countries .10 .15 The elasticity of substitution refers to each individual region's production function. It is defined as the optimal reduction in total demand for energy relative to that of capital and labor in response to a 1% increase in the relative price of energy, total output remaining constant. 6. International Trade and Capital Flows For each of the three regions' production functions, there is an elasticity of substitution between imports and domestic capital and labor. On the basis of the literature review cited by Whalley (1980, pp. 31-33), we have - 11 - adopted import trade elasticities of the order unity: 1.25 for the industri- alized nations and 0.80 for the developing countries. Since each region's imports constitute another's exports, there is no need to specify export elasticities of demand in this model. Side calculations suggest that the trade elasticities do not have a major impact upon energy price projections. They do, however, affect the relative prices of non-energy tradeables. In region 2, for example, case 1 implies an 83% real increase of export prices (e.g., through domestic inflation or through currency appreciation).l/ With these changes in the terms of trade, there are strong incentives to import non-energy tradeables. (Between 1978 and 1990, this generates a 14% annual increase in imports from region 3.) Moreover, these changes in the terms of trade lead to strong disincentives to export non-energy items from region 2. If the import elasticities were higher, the non-energy price adjustments might be lower, but trade volumes would still have to move in much the same direction so as to restore balance-of-payments equilibrium. To some extent, international capital flows can cushion the impact of rising oil prices. In order to span a wide range of views, two polar extremes will be examined. Neither is designed to be altogether realistic, but together they cover a realistic range of possibilities. The optimistic view will be described as that of "compensatory capital flows." In these cases, the oil exporters (region 2) recycle 10% of their energy revenues, and the net effect of international capital markets is that this entire amount is available to finance the merchandise trade deficit of region 3. Thus, the higher oil prices rise, the greater becomes the value of these compensatory capital flows. TT- Cases cited by number here and on following pages are defined in Appendix B. - 12 - In contrast, the pessimistic view is described as "zero trade deficits." In these cases, region 3 succeeds in borrowing just enough new capital to offset its non-merchandise current account deficit (including interest payments on past debts). With zero trade deficits, export volumes must be expanded, and there is a deterioration in ther terms of trade. Region 3's GDP growth is affected by amounts ranging up to 1.2% per year. Under the conditions associated with cases 2 and 6 (see Table 2) capital flows of $78 billion would permit a GDP gain of $167 billion in 1990. 7. Numerical Results For "high GDP growth" in region 1, eight alternative scenarios have been calculated. These differ with respect to energy supplies, demands, and capital flows. For a summary, see Figure 1 and Table 2. Details on each case are provided in Appendix B. Merchandise trade flows are expressed in value terms (adjusted for changes in terms of trade) in Table and in volume terms in Appendix B. According to WDR IV guidelines, the international price of oil will rise at 3% per year, net of inflation, between 1980 and 1990. This implies a 1990 price of about $45 per barrel, expressed in dollars of 1980 purchasing power. Cases 1, 4, 5 and 8 have been constructed so that they all lead to this level of oil prices. That is, real prices could increase by 3% annually during the 1980s - either with the 122 MBD level of supplies and "difficult" demand adjustments or with 114 MBD and "easy" adjustments. Note, however, that plausible changes in the input assumptions could lead to energy prices that are either much higher or lower than $45. If the "difficult" adjustment view is correct - and if 1990 energy supplies are limited to 114 MBD - there TABLE 2. Alternative projections of oil prices, GDP growth rates, and merchandise trade Results for 1990 Realized annual GDP growth Value of merchandise trade, rates, 1978-90 (percent) region 3, (billions of 1978 dollars, adjusted for changes Available Region i: Region 2: Region 3: in terms of trade) energy Industri- Oil ex- Oil supplies, alized porting importing Non- ierchan- regions Oil price coun- develop- develop- energy dise Case Capital Adjustment 1-3, (1980 tries ing ing Energy in- trade number flows of energy 1990 (MBD) $/barrel) countries countries imports ports Exports deficit High GDP growth (region 1): 1. Compensatory Difficult 122 45 3.2 7.1 4.5 73 143 156 60 2. Compensatory Difficult 114 67 3.0 7.4 4.0 123 106 151 78 3. Compensatory Easy 122 31 3.3 6.5 4.6 46 150 155 41 4. Compensatory Easy 114 43 3.2 6.8 4.3 79 125 153 51 5. Zero Deficits Difficult 122 44 3.2 7.4 3.6 51 114 165 0 6. Zero Deficits Difficult 114 64 3.1 7.7 2.8 86 77 163 0 7. Zero Deficits Easy 122 31 3.3 6.8 3.9 35 129 164 0 8. Zero Deficits Easy 114 42 3.3 7.0 3.5 60 102 162 0 Potential annual GDP growth at constant energy prices and other terms of trade, 1978-90 3.5 6.4 5.3 Low GDP growth (region 1): 9. Zero Deficits Difficult 116 43 2.8 7.0 3.5 46 107 153 0 1978 trade flows, region 3 16a/! 122 95 43 a/ This $16 billion refers to net merchandise imports recorded in SITC (Standard International Trade Classification) category 3. At energy import rates of 6.3 MBD and a c.i.f. price of $13.70 per barrel, the 1978 energy import bill would have been $31.5 billion. Since these two methods of estimation are inconsistent, one must be cautious in making comparisons between our 1990 projections based on physical import rates and the 1978 statistics referring to SITC category 3. - 12b - Figure 1 Oil Prices and CDP Growth Rates, Region 3 (high GDP growth in region 1) 1990 oil price (1980 $/barrel) 80' Key: 62 compensatory capital nows 60 - zero trade deficits 40- 20 L 0030 Case number 1 5 2 6 3 7 4 8 1990 Supplies (MBD) 122 114 122 114 -Oemand adjustment Difficult Easy Annual GDP growth rate, region 3 (1978-90o 4- .3 2 17 1~~~~~~~~~~~~~~~~~~~~~~~-o - 13 - could be a sharp run-up. (The price of a barrel of oil rises to about $65 in cases 2 and 6.) Conversely, with "easy" demand adjustments and 122 MBD of supplies, prices could remain close to their 1980 level of $33. Note that the GDP growth rate of the oil exporters is highly correlated with the level of oil prices. Oil prices are not significantly affected by the presence of com- pensatory capital flows (hatched bars in Figure 1) or by their absence (no hatching). It appears, however, that capital flows have a substantial impact upon the GDP growth rates of region 3, the oil-importing developing countries. If these flows are available to cushion the impact, a 100% rise in oil prices leads to a drop of 0.6% in their GDP growth rates. (Compare cases 2 and 3.) Without these flows, the drop is projected at 1.1%. (Compare cases 6 and 7.) In the most pessimistic scenario examined here (case 6), the GDP growth rate would be only 2.8% - barely enough to keep pace with the growth of population. Despite the wide range of possible energy prices, the GDP growth rates of the industrialized countries do not vary widely. Imported energy still remains a relatively small fraction of the industrialized countries GDP, and growth appears largely determined by the underlying assumptions with respect to the productivi:y of capital and labor. Even a 100% difference in energy prices leads to a difference of at most 0.3% in the annual GDP growth rates of these countries between 1978 and 1990. At first glance, this appears a counter-intuitive result - and quite different from the conventional wisdom expressed in newspaper headlines and editorial pages. Our analysis does not, however, refer to short-term political and military disruptions, but to medium-term economic trends. With a decade for energy demands and trade flows to adjust to higher prices, there is room for guarded optimism that energy constraints will not be the principal determinant of the industrialized countries growth during the 1980s. - 14 - On the mediumrterm prospects for oil prices, some insights may be obtained from the EMF's World Oil Study. See Figure 2, and note that the WDR IV guideline value for 1990 lies in the middle of the range obtained for the EMF's reference case. There is a wide spread in the price projections from the ten different models participating in this study - even though it was intended that all would be run on similar assumptions with respect to GDP growth rates, price elasticities of demand, OPEC capacity, oil resources, etc. ETA-MACRO was one of the models included in the EMF exercise (see Figure 2). Its 1990 price projection lies in the central cluster and cannot easily be distinguished from its neighbors. Among these models, ETA-MACRO was the only one to allow for dynamic energy-economy interactions - via the accumu- lation of capital and a "putty-clay" model of energy conservation. It is of particular interest, therefore, that the results of the EMF reference case check so closely with case 4 of the three-region model. Under this view of demand adjustments, it is relatively easy to decouple energy consumption from GDP growth in the industrialized countries: Three-region model, ETA-MACRO, case 4 (114 MDB reference for and "easy" demand EMF World Oil adjustments Study Annual growth rates, industrialized countries, 1978-90: Primary energy consumption 1.2% 1.29% GDP 3.2% 3.05% Ratio ("Energy/GDP 0.38 0.42 elasticity') - 14a - Figure 2 Energy Modeling Forum (EMF) world oil price projections, reference case 70 o 60 0' o% 50 u 40 '-4 30 20 10 1980 1985 1990 1995 2030 - 15 - Despite extensive econometric reserch, there is still no general agreement whether the "easy" or the "difficult" adjustment view is more nearly correct for the industrialized countries. See the diversity of results reported in the demand elasticity study by EMF (1980). For the developing countries, there is an even wider range of debate - and only a handful of empirical studies. Surely it ought to be a high-priority research topic to study the post-1973 energy price and consumption trends in these countries and to draw whatever inferences are possible on the basis of this evidence. 8. A Postscript on "Low GDP Growth" As of December 1980, WDR IV's "low" case had not been fully defined. It was generally understood that this would refer to a scenario in which the industrialized countries' GDP growth rate would be lowered by at least half a percentage point annually during the 1980s. This decline might be the result of high energy prices, or it might be attributed to declining growth in the labor force and productivity or to other factors. In any case, it was speci- fied that international oil prices would continue to increase by 3% annually in real terms. Case 9 represents an initial attempt to describe the WDR IV "low" case in terms of the three-region model. It is identical to case 5 (zero trade deficits and difficult demand adjustments) with only two exceptions: (a) region l's potential GDP growth rate is reduced from 3.5% to 3.0% for the years 1978-90; and (b) region 2's energy production is cut back by 6 MBD to avoid the erosion of prices in the face of sluggish demand growth. (See Table 2 and Appendix B.) Under these conditions, region l's realized GDP growth rate drops from 3.2% (case 5) to 2.8% (case 9). Perhaps the principal surprise is that - 16 - there are no major indirect,effects on region 3. Their export markets grow mDre slowly, but this leads to a minor decline in their GDP growth rate - from 3.6% (case 5) to 3.5% (case 9). Note however, that the indirect effects upon region 3 might be far more serious if low domestic growth were to stimulate political pressures for protectionism in the industrialized countries. This possibility has been incorporated in our "low GDP growth" case. -17- Appendix A. Model Formulation The following definitions are adopted here: Input data (excluding production function parameters) d domestic energy supplies in 1980, region j (adjusted for non- unitary GDP elasticities and capital transfers, if any) xiia index number of capital and labor inputs in 1990, region i; can also be interpreted as potential GDP at constant 1978 prices of energy and non-energy imports Quantity variables Yj realized GDP, region i (in 1978 dollars, adjusted for terms of trade Xi non-energy products of region i imported into region j; (i # j; i,j, - 1,2,3) x4Y= energy consumed by region j. Price variables It = price of non-energy products, region j (J = 1,2,3) IT4 = price of energy. It will be convenient to report all prices as nJP1" That is, the numeraire is defined as region 1 products, 1978 dollars. For 1980 dollars, add 25%. The nested CES production functions appear within the first three material balances below. There will be considerable debate about the magnitudes of the exponents in these CES functions. The ease or difficulty of substituting between domestic and imported non-energy inputs will be determined by the parameter a. The "elasticity of trade substitution" is defined as 1/(l - a). Similarly, the "elasticity of energy substitution" is 1/(1 - Given the values of the exponents a and 8, we employ 1978 data to estimate the aij constants that appear in the nested CES functions. (The 1978 benchmark estimates are reproduced in Appendix B.) Assuming that the inputs were optimally adjusted to the international prices prevailing in 1978, -18- it is straightforward to determine the aii coefficients from the first-order optimality conditions. That is, the marginal productivity of each input must be equal to its 1978 price. For details, see the dissertation of S. Kim (Stanford Universy, forthcoming). This will also describe our solution algorithm - an extension to nonlinear economies of the procedure described by Marine, Chao,-and Wilson (1980). In connections with this benchmarking, two observations should be noled: (1) To allow for the incomplete adjustment (approximately 50%) that had taken place by 1978 in response to the energy price increases of 1973-74, we assume that the 1978 "reference price" of oil was only $10 per barrel. This is the price inserted into the first-order optimality equations - not the actual 1978 price of $13.70. (2) The production function elasticities incorporate institutional and behavioral as well as technological constraints. In effect, our benchmarking procedure ignores the possibility of changes in tariff and non-tariff barriers to international trade between 1978 and 1990. Ot'ier approaches are required to investigate these barriers to adjustment. The model is based upon four material balances for the four tradeable commodities: GNP + exports < domestic production, non-energy of non- energy non-energy energy products inputs inputs + zxi [(< ajx ) $/a + ai4x64]l/S (i = 1,2,3) where subscripts for region i are omitted on exponents a and a. total total energy < energy consumption supplies 3 3 j-l 4j 1d1 -19- There is also one balance-of-trade constraint for each region: (value of value of value of energ non-energyf non-energy + imports exports / imports (exports) gi iJ - j w 1Xji 4 4i - ) j4i4 j #4 (i = 1,2,3). As written here, the three balance-of-trade constraints imply that net capital transfers will be zero in 1990. To allow for such transfers, we have adjusted the ownership of energy supplies - transferring 10% of region 2½s resources and placing them at the disposal of region 3. To reflect 1.3 GDP elasticities of energy demand (at constant prices) in the developing countries, another adjustment is made to the domestic energy supplies, d.. That is, 30% is added to the base-year energy supplies and demands. The identical amount is added to the 1990 domestic energy supplies. In this way, we allow for a gradual long-term decline in the GDP elasticity of demands. This 30% adjustment can also be interpreted as an allowance for non-commercial to be replaced by commercial energy. One piece of algebra is straightforward, but is not shown explicitly: In cases 1,3,5,7 and 9, region 2½s energy supplies include 3 MBD available at a domestic cost of $12 per barrel (1978 price level). These supplies are not available in the shortfall scenarios (cases 2,4,5 and 8). One final detail: The 1978 base-year energy consumption was adjusted so that it would be identical to the supplies available within the market economies. Consumption was increased by 0.6% in each region to account for the net effect of exports from the centrally planned economies, bunkers, and other items. -20- Appendix B. Nine Alternative Projections High GDP growth: 1. Compensatory capitai flows; difficult demand adjustments; 122 MBD 2. " ", 114 MBD 3. " "; "; 122 MBD 4. " " 114 MBD 5. Xero trade deficits ; difficult demand adjustments ; 122 MBD 6. " "; "; 114 MBD 7. ; easy demand adjustments ; 122 MBD 8. " " 114 MBD Low GDP growth: 9. Zero trade deficits ; difficult demand adjustments ; 114 MBD Note: In the following tabulations, DCS = developing countries. - 21 - CASE 1 HIGH GDP GROWTH COMPENSATING CAPITAL FLOWS DIFFICULT ADJUSTMENT OF ENERGY DEMANDS 122 MED ENERGY SUPPLIES IN 1990 (UNIT FOR GDP AND EXPORTS: BILLIONS OF 1978 U.S. DOLLARS) (UNIT FOR ENERGY: MILLION BARRELS DAILY: OIL EQUIVALANT) EXPORTS TO EXPORTS TO EXPORTS TO ENERGY DOMESTIC 1990 REGION 1, REGION 2, REGION 3, CONSUMP- ENERGY ELASTICITY REAL- POTEN- NON-ENERGY NON-ENERGY NON-ENERGY TION PRODUCTION IZED TIAL AVAILABLE TRADE ENERGY Region 1 1978 5547. 5547. --- 85.4 120.4 70.7 46.9 Industri- 1990 8075. 8382. 314.6 140.3 86.8 62.3 1.25 0.15 alized Countries Annual Growth 3.2% 3.5% 11.5% 1.3% 1.7% 2.4% Region 2 1978 457. 457. 8.4 ---- 2.2 5.8 35.9 Oil Ex- 1990 1045. 962. 5.2 1.4 15.0 45.0 0.80 0.10 porting DCS Annual Growth 7.1% 6.4% -3.9% -3.5% 8.2% 1.9% Region 3 1978 819. 819. 85.1 10.1 ---- 13.1 6.8 Oil Im- 1990 1390. 1522. 166.2 48.2 20.2 14.7 0.80 0.10 porting DCS Annual Growth 4.5% 5.3% 5.7% 13.9% 3.7% 6.6% Total 1978 6823. 6823. 93.5 95.5 122.6 89.6 89.6 Regions, 1990 10510. 10866. 171.4 362.8 141.8 122.0 122.0 1-3 Annual Growth 3.7% 4.0% 5.2% 11.8 1.2 2.6% 2.6% 1990 Equilibrium 1.000 1.833(A) 0.727(A) 45.39(B) Prices NOTES: (A) TERMS OF TRADE INDICES. RATIOS TO 1978 DOLLARS FOR REGION 1. (B) ENERGY PRICES EXPRESSED IN 1980 $/BARREL; COMPARE WITH THE 1978 ACTUAL PRICE OF $13.7 AND THE 1978 "REFERENCE PRICE" OF $10/BARREL EMPLOYED FOR BENCHMARKING PURPOSES. ENERGY-GDP ELASTICITIES OF 1.3 AT CONSTANT PRICES IN REGIONS 2 AND 3. DECLINING AFTER 1978. - 22 - CASE 2 HIGH GDP GROWTH COMPENSATING CAPITAL FLOWS DIFFICULT ADJUSTMENT OF ENERGY DEMANDS 114 MBD ENERGY SUPPLIES IN 1990 (UNIT FOR GDP AND EXPORTS: BILLIONS OF 1978 U.S. DOLLARS) (UNIT FOR ENERGY: MILLION BARRELS DAILY: OIL EQUIVALANT) EXPORTS TO EXPORTS TO EXPORTS TO ENERGY DOMESTIC 1990 REGION 1, REGION 2, REGION 3, CONSUMP- ENERGY ELASTICITY REAL- POTEN- NON-ENERGY NON-ENERGY NON-ENERGY TION PRODUCTION IZED TIAL AVAILABLE TRADE ENERGY RegLon 1 1978 5547. 5547. ---- 85.4 120.4 70.7 46.9 Ind.istri- 1990 7940. 8382. 375.1 103.6 80.7 62.3 1.25 0.15 alized Couatries Annual Growth 3.0% 3.5% 13.1% -1.2% 1.1% 2.4% Region 2 1978 457. 457. 8.4 ---- 2.2 5.8 35.9 Oil Ex- 1990 1082. 962. 3.6 1.0 15.2 40.0 0.80 0.10 porting DCS Annual Growth 7.4% 6.4% -6.7% -6.4% 8.4% 0.9% Region 3 1978 819. 819. 85.1. 10.1 ---- 13.1 6.8 Oil Im- 1990 1310. 1522. 153.3 58.0 18.0 11.7 0.80 0.10 porting DCS Annual Growth 4.0% 5.3% 5.0% 15.7% 2.7% 4.6% Total 1978 6823. 6823. 93.5 95.5 122.6 89.6 89.6 Regions, 1990 10332. 10866. 157.0 433.1 104.6 114.0 114.0 1-3 Annual Growth 3.5% 4.0% 4.4% 13.4% -1.3% 2.0% 2.0% 19S'O Equilibrium 1.000 2.238(A) 0.716(A) 67.00(B) Prices NOV'ES: (A: TERMS OF TRADE INDICES. RATIOS TO 1978 DOLLARS FOR REGION 1. (B:' ENERGY PRICES EXPRESSED IN 1980 $/BARREL; COMPARE WITH THE 1978 ACTUAL PRICE OF $13.7 AND THE 1978 "REFERENCE PRICE" OF $10/BARREL EMPLOYED FOR BENCHMARKING PURPOSES. ENERGY-GDP ELASTICITIES OF 1.3 AT CONSTANT PRICES IN REGIONS 2 AND 3. DECLINING AFTER 1978. - 23 - CASE 3 HIGH GDP GROWTH COMPENSATING CAPITAL FLOWS EASY ADJUSTMENT OF ENERGY DEMANDS 122 MBD ENERGY SUPPLIES IN 1990 (UNIT FOR GDP AND EXPORTS: BILLIONS OF 1978 U.S. DOLLARS) (UNIT FOR ENERGY: MILLION BARRELS DAILY: OIL EQUIVALANT) EXPORTS TO EXPORTS TO EXPORTS TO ENERGY DOMESTIC 1990 REGION 1, REGION 2, REGION 3, CONSUMP- ENERGY ELASTICITY REAL- POTEN- NON-ENERGY NON-ENERGY NON-ENERGY TION PRODUCTION IZED TIAL AVAILABLE TRADE ENERGY Region 1 1978 5547. 5547. ---- 85.4 120.4 .70.7 46.9 Industri- 1990 82]1. 8382. 230.2 147.9 88.2 62.3 1.25 0.20 alized Countries Annual Growth 3.3% 3.5% 8.6% 1.7% 1.9% 2.4% Region 2 1978 457. 457. 8.4 ---- 2.2 5.8 35.9 Oil Ex- 1990 976. 962. 8.2 2.0 14.0 45.0 0.80 0.10 porting DCS Annual Growth 6.5% 6.4% -0.2% -0.9% 7.6% 1.9% Region 3 1978 819. 819. 85.1 10.1 ---- 13.1 6.8 Oil Im- 1990 1399. 1522. 188.3 36.5 19.7 14.7 0.80 0.15 porting DCS Annual Growth 4.6% 5.3% 6.8% 11.3% 3.5% 6.6% Total 1978 6823. 6823. 93.5 95.5 122.6 89.6 89.6 Regions, 1990 10585. 10866. 196.6 266.7 149.9 122.0 122.0 1-3 Annual Growth 3.7% 4.0% 6.4% 8.9% 1.7% 2.6% 2.6% 1990 Equilibrium 1.000 1.337(A) 0.691(A) 31.29(B) Prices NOTES: (A) TERMS OF TRADE INDICES. RATIOS TO 1978 DOLLARS FOR REGION 1. (B) ENERGY PRICES EXPRESSED IN 1980 $/BARREL; COMPARE WITH THE 1978 ACTUAL PRICE OF $13.7 AND THE 1978 "REFERENCE PRICE' OF $10/BARREL EMPLOYED FOR BENCHMARKING PURPOSES. ENERGY-GDP ELASTICITIES OF 1.3 AT CONSTANT PRICES IN REGIONS 2 AND 3. DECLINING AFTER 1978. - 24 - CASE 4 HIGH GDP GROWTH COMPENSATING CAPITAL FLOWS EASY ADJUSTMENT OF ENERGY DEMANDS 114 MBD ENERGY SUPPLIES IN 1990 (UNIT FOR GDP AND EXPORTS: BILLIONS OF 1978 U.S. DOLLARS) (UNIT FOR ENERGY: MILLION BARRELS DAILY: OIL EQUIVALANT) EXPORTS TO EXPORTS TO EXPORTS TO ENERGY DOMESTIC 1990 REGION 1, REGION 2, REGION 3, CONSUMP- ENERGY ELASTICITY REAL- POTEN- NON-ENERGY NON-ENERGY NON-ENERGY TION PRODUCTION IZED TIAL AVAILABLE TRADE ENERGY Region 1 1978 5547. 5547. ---- 85.4 120.4 70.7 46.9 Industri- 1990 8130. 8382. 260.7 122.7 81.9 62.3 1.25 0.20 alized Countries Annual Growth 3.2% 3.5% 9.7% 0.2% 1.2% 2.4 Region 2 1978 457. 457. 8.4 ---- 2.2 5.8 35.9 Oi] Ex- 1990 1002. 962. 6.5 1.6 14.1 40.0 0.80 0.10 porting DC' Annual Growth 6.8% 6.4% -2.2% -2.7% 7.7% 0.9% Region 3 1978 819. 819. 85.1 10.1 ---- 13.1 6.8 Oil Im- 1990 1354. 1522. 181.2 41.6 17.9 11.7 0.80 0.15 porting DC' Annual Growth 4.3% 5.3% 6.5% 12.5% 2.6% 4.6% Tol:al 1978 6823. 6823. 93.5 95.5 122.6 89.6 89.6 Regions, 1990 10487. 10866. 187.6 302.3 124.3 114.0 114.0 1-3 Annual Growth 3.6% 4.0% 6.0% 10.1% 0.1% 2.0% 2.0% 91'0 Eqriilibrium 1.000 1.547(A) 0.688(A) 43.37(B) Pr Lces NOTES: (A) TERMS OF TRADE INDICES. RAT,IOS TO 1978 DOLLARS FOR REGION 1. (B) ENERGY PRICES EXPRESSED IN 1,980 $/BARREL; COMPARE WITH THE 1978 ACTUAL PRICE OF $13.7 AND THE 1978 "REFERENCE PRICE" OF $10/BARREL EMPLOYED FOR BENCHMARKING PURPOSES. ENERGY-GDP ELASTICITIES OF 1.3 AT CONSTANT PRICES IN REGIONS 2 AND 3. DECLINING AFTER 1978. - 25 - CASE 5 HIGH GDP GROWTH ZERO TRADE DEFICITS DIFFICULT ADJUSTMENT OF ENERGY DEMANDS 122 MBD ENERGY SUPPLIES IN 1990 (UNIT FOR GDP AND EXPORTS: BILLIONS OF 1978 U.S. DOLLARS) (UNIT FOR ENERGY: MILL1ON BARRELS DAILY: OIL EQUIVALANT) EXPORTS TO EXPORTS TO EXPORTS TO ENERGY DOMESTIC 1990 REGION 1, REGION 2, REGION 3, CONSUMP- ENERGY ELASTICITY REAL- POTEN- NON-ENERGY NON-ENERGY NON-ENERGY TION PRODUCTION IZED TIAL AVAILABLE TRADE ENERGY Region 1 1978 5547. 5547. ---- 85.4 120.4 70.7 46.9 Industri- 1990 8108. 8382. 351.8 112.0 87.6 62.3 1.25 0.15 alized Countries Annual Growth 3.2% 3.5% 12.5% -0.6% 1.8% 2.4 Region 2 1978 457. 457. 8.4 ---- 2.2 5.8 35.9 Oil Ex- --1990 1075. 962. 4.7 2.0 15.7 45.0 0.80 0.10 porting DCS Annual - Growth,7.4% 6.4% -4.7% -6.1% 8.6% 1.9% Region 3 1978 819. 819. 85.1 10.1 ---- 13.1 6.8 Oil Im- 1990 1253. 1522. 214.6 62.4 18.7 14.7 0.80 0.10 porting DCS Annual Growth 3.6% 5.3% 8.0% 16.4% 3.0% 6.6% Total 1978 6823. 6823. 93.5 95.5 122.6 89.6 89.6 Regions, 1990 10436. 10866. 219.3 414.2 113.1 122.0 122.0 1-3 Annual Growth 3.6% 4.0% 7.4% 13.0% -0.7% 2.6% 2.6% 1990 Equilibrium 1.000 2.022(A) 0.598(A) 44.10(B) Prices NOTES: (A) TERMS OF TRADE INDICES. RATIOS TO 1978 DOLLARS FOR REGION 1. (B) ENERGY PRICES EXPRESSED IN 1980 $/BARREL; COMPARE WITH THE 1978 ACTUAL PRICE OF $13.7 AND THE 1978 "REFERENCE PRICE" OF $10/BARREL EMPLOYED FOR BENCHMARKING PURPOSES. ENERGY-GDP ELASTICITIES OF 1.3 AT CONSTANT PRICES IN REGIONS 2 AND 3. DECLINING AFTER 1978. - 26 - CASE 6 HIGH GDP GROWTH ZERO TRADE DEFICITS DIFFICULT ADJUSTMENT OF ENERGY DEMANDS 114 MBD ENERGY SUPPLIES (UNIT FOR GDP AND EXPORTS: BILLIONS OF 1978 U.S. DOLLARS) (UNIT FOR ENERGY: MILLION BARRELS DAILY: OIL EQUIVALANT) EXPORTS TO EXPORTS TO EXPORTS TO ENERGY DOMESTIC 1990 REGION 1, REGION 2, REGION 3, CONSUMP- ENERGY ELASTICITY REAL- POTEN- NON-ENERGY NON-ENERGY NON-ENERGY TION PRODUCTION IZED TIAL AVAILABLE TRADE ENERGY Region 1 1978 5547. 5547. ---- 85.4 120.4 70.7 46.9 Industri- 1990 7980. 8382. 417.1 75.1 81.8 62.3 1.25 0.15 alized Countries Annual Growth 3.1% 3.5% 14.1% -3.9% 1.2% 2.4 ReEion 2 1978 457. 457. 8.4 ---- 2.2 5.8 35.9 Oi] Ex- 1990 1111. 962. 3.4 0.7 15.9 40.0 0.80 0.10 porting DC' Annual Growth 7.7% 6.4% -7.4% -9.4% 8.8% 0.9% Rejion 3 1978 819. 819. 85.1 10.1 ---- 13.1 6.8 Oil. Im- 1990 1143. 1522. 204.2 76.3 16.3 11.7 0.80 0.10 porting DC' Annual Growth 2.8% 5.3% 7.6% 18.4% 1.8% 4.6% Total 1978 6823. 6823. 93.5 95.5 122.6 89.6 89.6 Regions, 1990 10234. 10866. 207.6 493.4 75.7 114.0 114.0 1--3 Annual Growth 3.4% 4.0% 6.9% 14.7% -3.9% 2.0% 2.0% 1990 Eqiilibrium 1.000 2.434(A) 0.580(A) 64.11(B) Pr Lces NOrES: (A) TERMS OF TRADE INDICES. RATIOS TO 1978 DOLLARS FOR REGION 1. (B) ENERGY PRICES EXPRESSED IN 1980 $/BARREL; COMPARE WITH THE 1978 ACTUAL PRICE OF $13.7 AND THE 1978 "REFERENCE PRICE" OF $10/BARREL EMPLOYED FOR BENCHMARKING PURPOSES. ENERGY-GDP ELASTICITIES OF 1.3 AT CONSTANT PRICES IN REGIONS 2 AND 3. DECLINING AFTER 1978. - 27 - CASE 7 HIGH GDP GROWTH ZERO TRADE DEFICITS EASY ADJUSTMENT OF ENERGY DEMANDS 122 MBD ENERGY SUPPLIES (UNIT FOR GDP AND EXPORTS: BILLIONS OF 1978 U.S. DOLLARS) (UNIT FOR ENERGY: MILLION BARRELS DAILY: OIL EQUIVALANT) EXPORTS TO EXPORTS TO EXPORTS TO ENERGY DOMESTIC 1990 REGION 1, REGION 2, REGION 3, CONSUMP- ENERGY ELASTICITY REAL- POTEN- NON-ENERGY NON-ENERGY NON-ENERGY TION PRODUCTION IZED TIAL AVAILABLE TRADE ENERGY Region 1 1978 5547. 5547. --- 85.4 120.4 70.7 46.9 Industri- 1990 8232. 8382. 259.0 126.9 88.8 62.3 1.25 0.15 alized Countries Annual Growth 3.3% 3.5% 9.7% 0.4% 1.9% 2.4 Region 2 1978 457. 457. 8.4 ---- 2.2 5.8 35.9 Oil Ex- 1990 1006. 962. 7.3 1.5 14.7 45.0 0.80 0.10 porting DCS Annual Growth 6.8% 6.4% -1.2% -3.0% 8.0% 1.9% Region 3 1978 819. 819. 85.1 10.1 ---- 13.1 6.8 Oil Im- 1990 1300. 1522. 226.8 46.1 18.5 14.7 0.80 0.15 porting DCS Annual Growth 3.9% 5.3% 8.5% 13.5% 2.9% 6.6% Total 1978 6823. 6823. 93.5, 95.5 122.6 89.6 89.6 Regions, 1990 10538. 10866. 234.1 305.1 128.4 122.0 122.0 1-3 Annual Growth 3.7% 4.0% 7.9% 10.2% 0.4% 2.6% 2.6% 1990 Equilibrium 1.000 1.470(A) 0.600(A) 30.90(B) Prices NOTES: (A) TERMS OF TRADE INDICES. RATIOS TO 1978 DOLLARS FOR REGION 1. (B) ENERGY PRICES EXPRESSED IN 1980 $/BARREL; COMPARE WITH THE 1978 ACTUAL PRICE OF $13.7 AND THE 1978 "REFERENCE PRICE" OF $10/BARREL EMPLOYED FOR BENCHMARKING PURPOSES. ENERGY-GDP ELASTICITIES OF 1.3 AT CONSTANT PRICES IN REGIONS 2 AND 3. DECLINING AFTER 1978. - 28 - CASE 8 HIGH GDP GROWTH ZERO TRADE DEFICITS EASY ADJUSTMENT OF ENERGY DEMANDS 114 MBD ENERGY SUPPLIES (UNIT FOR GDP AND EXPORTS: BILLIONS OF 1978 U.S. DOLLARS) (UNIT FOR ENERGY: MILLION BARRELS DAILY: OIL EQUIVALANT) EXPORTS TO EXPORTS TO EXPORTS TO ENERGY DOMESTIC 1990 REGION 1, REGION 2, REGION 3, CONSUMP- ENERGY ELASTICITY REAL- POTEN- NON-ENERGY NON-ENERGY NON-ENERGY TION PRODUCTION IZED TIAL AVAILABLE TRADE ENERGY RegLon 1 1978 5547. 5547. - -- 85.4 120.4 70.7 46.9 Indistri- 1990 8156. 8382. 292.9 99.7 88.6 62.3 1.25 0.20 alized Cou3tries Annual Growth 3.3% 3.5% 10.8% -1.6% 1.3% 2.4 Region 2 1978 457. 457. 8.4 ---- 2.2 5.8 35.9 Oil Ex- 1990 1033. 962. 5.8 1.2 14.8 40.0 0.80 0.10 porting DCS Annual Growth 7.0% 6.4% -3.0% -5.0% 8.1% 0.9% Region 3 1978 819. 819. 85.1 10.1 ---- 13.1 6.8 Oil Im- 1990 1236. 1522. 224.4 53.4 16.6 11.7 0.80 0.15 porting DCS Annual Growth 3.5% 5.3% 8.4% 14.9% 2.0% 4.6% Total 1978 6823. 6823. 93.5 95.5 122.6 89.6 89.6 Regions, 1990 14248. 10866. 230.2 346.3 100.9 114.0 114.0 1-3 Annual Growth 3.7% 4.0% 7.8% 11.3% -1.6% 2.0% 2.0% 19S'0 Equiilibrium 1.000 1.703(A) 0.583(A) 42.42(B) Prices NOC)ES: (A> TERMS OF TRADE INDICES. RATIOS TO 1978 DOLLARS FOR REGION 1. (B' ENERGY PRICES EXPRESSED IN 1980 $/BARREL; COMPARE WITH THE 1978 ACTUAL PRICE OF $13.7 AND THE 1978 "REFERENCE PRICE" OF $10/BARREL EMPLOYED FOR BENCHMARKING PURPOSES. ENERGY-GDP ELASTICITIES OF 1.3 AT CONSTANT PRICES IN REGIONS 2 AND 3. DECLINING AFTER 1978. - 29 - CASE 9 HIGH GDP GROWTH ZERO TRADE DEFICITS DIFFICULT ADJUSTMENT OF ENERGY DEMANDS 116 MBD ENERGY SUPPLIES (UNIT FOR GDP AND EXPORTS: BILLIONS OF 1978 U.S. DOLLARS) (UNIT FOR ENERGY: MILLION BARRELS DAILY: OIL EQUIVALANT) EXPORTS TO EXPORTS TO EXPORTS TO ENERGY DOMESTIC 1990 REGION 1, REGION 2, REGION 3, CONSUMP- ENERGY ELASTICITY REAL- POTEN- NON-ENERGY NON-ENERGY NON-ENERGY TION PRODUCTION IZED TIAL AVAILABLE TRADE ENERGY Region 1 1978 5547. 5547. --- 85.4 120.4 70.7 46.9 Industri- 1990 7708. 7909. 288.4 105.6 83.0 62.3 1.25 0.15 alized Countries Annual Growth 2.8% 3.0% 10.7% -1.1% 1.3% 2.4 Region 2 1978 457. 457. 8.4 ---- 2.2 5.8 35.9 Oil Ex- 1990 1030. 962. 5.5 1.1 14.7 39.0 0.80 0.10 porting DCS Annual Growth 7.0% 6.4% -3.5% -5.6% 8.0% 0.7% Region 3 1978 819. 819. 85.1 10.1 ---- 13.1 6.8 Oil Im- 1990 1241. 1522. 217.1 53.5 18.3 14.7 0.80 0.10 porting DCS Annual Growth 3.5% 5.3% 8.1% 14.9% 2.8% 6.6% Total 1978 6823. 6823. 93.5 95.5 122.6 89.6 89.6 Regions, 1990 9979 10393. 222.5 341.9 106.7 116.0 116.0 1-3 Annual Growth 3.2% 3.6% 7.5% 11.2% -1.1% 2.2% 2.2% 1990 Equilibrium 1.000 1.682(A) 0.567(A) 43.30(B) Prices NOTES: (A) TERMS OF TRADE INDICES. RATIOS TO 1978 DOLLARS FOR REGION 1. (B) ENERGY PRICES EXPRESSED IN 1980 $/BARREL; COMPARE WITH THE 1978 ACTUAL PRICE OF $13.7 AND THE 1978 "REFERENCE PRICE" OF $10/BARREL EMPLOYED FOR BENCHMARKING PURPOSES. ENERGY-GDP ELASTICITIES OF 1.3 AT CONSTANT PRICES IN REGIONS 2 AND 3. DECLINING AFTER 1978. - 30 - References Armington, P. S. (1969) "A Theory of Demand for Products Distinguished by Place of Production" and "The Geographic Pattern of Trade and the Effects of Price Changes," International Monetary Fund Staff Papers XVI, March and July. Barten, A. P. (1971) "An Import Allocation Model for the Common Market," Cahiers Economiques de Bruxelles, Universite Libre de Bruxelles, No. 50, 2e. trimestre. Blitzer, C. R., B. J. Choe, A. Lambertini (1979) "Energy in the 1980s: Global Supply and Demand Analysis," International Bank for Reconstruction and Development, Washington,: D.C., January. I Dunkerley, J., and S. Matsuba (1980) Annual Report to Congress, 1979. Resources for the Future, Washington, D.C., November. U.S. Energy Information Administration (1980) Annual Report to Congress, 1979. Volume Three: Synopsis, U.S. Department of Energy, Washington, D.C., October. Erergy Modeling Forum (EMF) (1980) "Energy Modeling Forum 4: Aggregate Elasticity of Energy Demand," Stanford University, January. E2zati, A. (1978) World Energy Markets and OPEC Stability, Lexington, Mass., Lexington Books. Ginsburgh, V., and J. Waelbroeck (1975) "A General Equilibrium Model of World Trade, Part I, Full Format Computation of Economic Equilibria," Cowles Foundation Discussion Paper [No. 412, Yale University. H:'ckman, B.G., Y. Kuroda, and L.J. Lau (1979) "The Pacific Basin in World Trade: An Analysis of Changing Trade Patterns, 1955-1975," Empirical Economics 4, Issue I. H:Lckman, B.G., and L.J. Lau (1973) "Elasticities of Substitution and Export Demands in a World Trade Model," European Economic Review 4. Manne, A.S., H. Chao, and R. Wilson (1989) "Consumption of Competitive E:quilibria by a Sequence of Linear Programs," Econometrica, November. WValley, J. (1980) "An Evaluation of the Recent Tokyo Round Table Agreement th1-rough a General Equilibrium Model of World Trade Involving Major Training Areas," University of Western Ontario, April. Wilson, Carroll L., ed. (1977) Energy: Global Prospects 1985-2000, Workshop oa Alternative Energy Strategies (WAES), New York, McGraw-Hill, 1977 WDrld Bank (1981) World Development Report 1981. New York: Oxford lJniversity Press. COMPANION PAPERS IN THIS SERIES No. TITLE OF PAPER AUTHOR 449 Policy Experience in Twelve Less Developed Countries B. Balassa 470 Industrial Country Policy and Adjustment to Imports J.M. Finger from Developing Countries 471 The Political Structure of the New Protectionism D. Nelson (consultant) 472 Adjustment to External Shocks in Developing Countries B. Balassa 473 Food Policy Issues in Low-Income Countries E. Clay (consultant) 474 Energy, International Trade, and Economic Growth A. Manne (consultant) 475 Capital-Importing Oil Exporters: Adjustment Issues A.H. Gelb and Policy Choices 476 Notes on the Analysis of Capital Flows to Developing R.C. Bryant (consultani Nations and the 'Recycling' Problem 477 Adjustment Experience and Growth Prospects of the F. Jaspersen Semi-Industrial Countries 478 Trade Policy Issues for the Developing Countries I. Frank (consultant) in the 1980s 479 Trade among Developing Countries: Theory, Policy 0. Havrylyshyn Issues, and Principal Trends (consultant) M. Wolf 480 Trade in Services: Economic Determinants and A. Sapir (consultant) Development-Related Issues E. Lutz 481 International Migrant Workers' Remittances: Issues G. Swamy and Prospects 482 Private Bank Lending to Developing Countries R. O'Brien (consultant' 483 Development Prospects of the Capital Surplus R. Hablutzel Oil-Exporting Countries 484 Private Capital Flows to Developing Countries and A. Fleming Their Determination 485 International Adjustment in the 1980s V. Joshi (consultant) No. TITLE OF PAPER AUTHOR 486 Adjustment in Low-Income Africa R. Liebenthal 487 A Comparative Analysis of Developing Country C. Wallich Adjustment Experiences in the 1970s: Low-Income South Asia 488 Developments in and Prospects for the External N. Hope Debt of the Developing Countries: 1970-80 and Beyond 489 Global Energy Prospects B.J. Choe A. Lambertini P. Pollak *** HD9502 .A2 M36 1981 c.2 Manne, Alan Sueamann. Energy, international trade, and economic . ',growth.