Final Report Summary - HOP! (HOP! - Macro-economic impact of High Oil Price in Europe)
The HOP! research project has been co-funded by the European Commission DG Research to provide quantitative and qualitative analysis of direct and indirect impacts on the European economy of long-term oil price escalation. The study has been undertaken by three partners, with TRT Trasporti e Territorio (Italy) taking the lead and collaborating with Fraunhofer Institute Systems and Innovation research (Germany) and the Institute for Prospective Technological Studies of the European Commission Directorate-General Joint Research Council (Spain).
In order to quantify direct and indirect impacts on the transport, energy and economic systems, a modelling approach has been applied by combining the global partial equilibrium energy model 'Prospective outlook on long-term energy systems' (POLES) with the 'Assessment of transport strategies' (ASTRA) model, developed over the last decade as a strategic tool for the analysis of the interaction between transport, economy and environment. According to an already tested methodology, the two models are used in an interlinked way to run alternative scenarios corresponding to different sets of assumptions about cost of oil and alternative energy and transport technologies, making reference to the time horizon of the year 2050.
Given the features of the two models, the approach in HOP! was based on the assumption that market mechanisms allow energy supply to cater for energy demand. In particular, the models simulate that supply of alternative energy sources depends on price competitiveness and that investments are directed to alternatives and efficiency technologies such that energy is produced in the requested quantity. Government support of investments in response to high oil prices is not anticipated, though the debate on market failure suggests that designing suitable policies to either channel private investments into the required direction or directly invest public resources should be a major and urgent task for the EU.
There are numerous direct and indirect impacts of high oil prices on the various sectors of the economy, even if focus is to be put only on the most relevant effects. Furthermore, many of the issues are interlinked and some impacts may lead the system to even turn into opposite directions. For instance, the impact of higher costs of energy and transport are expected to be negative on economic growth, whereas investments in alternative energy sources are expected to provide a positive contribution. According to which of the two effects is stronger and faster, the economy can react more positively or negatively. Overall, the final result can hardly be predicted on a qualitative basis and is likely to change over time.
For this reason, an analytical toolbox consisting of the two interconnected models - POLES (including the Biofuels model BioPOL) and ASTRA - is applied to simulate in a consistent way the effects of various scenarios assuming high oil prices, taking into account various feedback loops and the dynamics of impacts. The time horizon of the simulations ends in 2050, the assessment being focused on the EU, as only POLES is a global model.
The POLES model covers the energy field with supply of energy resources on world level, energy demand and development of energy prices with an exogenously given economic development, while the ASTRA model deals with:
i) the transport field with infrastructure supply and transport demand;
ii) the macroeconomic system, with a module that endogenously forecasts economic development under varying policy conditions. The two models are linked as follows:
-ASTRA receives from POLES: fuel prices, the value of investments for developing alternative energy sources and the trade of fossil fuels;
-POLES receives gross domestic product (GDP) development, energy demand for the transport sector and the economic activity per sector from ASTRA.
The simulation of scenarios is an iterative process: POLES starts the simulation to provide starting results for ASTRA, whose interface results are transferred to POLES. Scenario run is then replicated in POLES to produce updated outcomes for ASTRA and so on. At the end of each iteration, results are compared with those of the previous iteration and the process was stopped when in both models differences are sufficiently small. Not all impacts are covered at the same level of detail and that various assumptions are used in the structures of the model. As a whole, the models refer to a world where market is able to generate a peaceful development and where investments ensure economic growth and energy supply or reduce the need for energy. This is the perspective assumed in the HOP! models.
To get a comprehensive picture of the economic impacts, a series of scenarios have been defined and compared with a reference projection. In the reference scenario it is expected that the European economy continues to grow in the coming decades, where growth is measured as the growth of GDP in constant prices. The relative growth rate is expected to be much stronger for the new Member States than for the Member States before the year 2004 (EU-15). For the new Member States an average annual growth of about +2.7 % is expected, while the EU-15 grows by less than half of this speed with about +1.2 %.
With respect to oil reserves and oil production, the reference scenario refers to the optimistic assumptions that stem from the estimation of US Geological Survey (USGS) on the worldwide oil and gas fields. In the case of synthetic fuels and other fuels, it is assumed that they substitute transport fuels. Individuals and freight mobility is expected to increase at different speeds when EU-15 and more recent EU Member States are considered.
The 150 smooth scenario assumes a smoothly increasing oil prices which reaches a level of EUR 150 2000/bbl in 2020. This leads to increased investment in energy efficiency as well as in alternative sources. A carbon value rising from EUR 5/tCO2 to EUR 30/tCO2 is taken into consideration.
- 150 smooth no invest scenario assumes that the level of investments remain more or less the same as in the reference run.
- 150 smooth reduced tax scenario and 150 smooth carbon tax scenario vary the taxation level: a tax reduction by 20 % with the purpose to limit the increase of transport costs is assumed in the former and a carbon taxation raised to EUR 30/tCO2 aiming at higher tax revenues to compensate higher governmental investments is considered in the latter.
- 150 early scenario and 150 late scenario vary the way oil prices increase: in an early step between 2010 and 2012, which enables to look at the impacts of a steep rise of high oil prices right now, and with a late step to look at the impacts if we assume a moderate oil price development, which suddenly turns out to be false.% L- 220 smooth scenario investigates a higher oil prices than HOP! 1 scenario (> EUR 220/bbl in 2020).
- Two last scenarios explore the impacts of extraordinarily high oil prices reached with a step in the year 2020; 600 early assumes a price of EUR 600/bbl in 2020, while 800 early assumes a price of EUR 800/bbl in 2020.
Roughly a 1 % point loss of GDP would amount to a GDP of EU-27 that is EUR 100 billion lower than in the reference. In most scenarios the GDP losses can be observed over at least one or two decades, in some even until 2050. Linking the results with the conclusions of the sensitivity tests it could be that the annual loss of GDP would reach even over EUR 1 trillion for the EU-27.
In terms of employment the numbers are more dramatic: a 1 % point loss of employment amounts to 2 million less employed persons in Europe, which means that even in the less drastic scenarios about 10 million jobs get lost in the EU-27. The expected oil-GDP response to an oil price shock relationship would be, however, less pronounced than those observed for the oil price shocks in the 1970s and 1980s. This is due to the large variety of dampening effects on both the oil price and its economic impact.
If high oil price is one of the critical issues at the global level, climate change is another one. It is important to note that even though investments in oil substitutes can contribute to high global warming, this is not necessarily the case. If, on the one hand, high oil prices would lead to a massive exploitation of unconventional oil resources and the use of coal-based transport fuels (CtL), emissions would rise compared to a reference scenario that is based on conventional oil. On the other hand, a number of technological options can simultaneously decrease oil consumption and lower greenhouse gas emissions. Such options include renewable energies and fuels, and above all, energy savings.
The HOP! results suggest that investments in alternative energy sources and energy efficiency are the key factor for dampening negative impacts of high oil prices. If investments were either not available or too late, the macroeconomic impacts of high oil prices in the EU-27 would be significantly greater. A first policy issue is therefore how to promote investments in the required size either directly through public budgets or by creating incentives that encourage investments of the private sector.
Overall, the conclusion is that oil scarcity and oil price shocks can have significant negative impacts on the EU - but they need not, if the EU prepares itself adequately. A first policy issue is therefore how to promote investments in the required size either directly through public budgets or by creating incentives that encourage investments of the private sector. Looking at the fast decreasing mid-term oil production forecast, the EU should have enough reasons to prepare.
In order to quantify direct and indirect impacts on the transport, energy and economic systems, a modelling approach has been applied by combining the global partial equilibrium energy model 'Prospective outlook on long-term energy systems' (POLES) with the 'Assessment of transport strategies' (ASTRA) model, developed over the last decade as a strategic tool for the analysis of the interaction between transport, economy and environment. According to an already tested methodology, the two models are used in an interlinked way to run alternative scenarios corresponding to different sets of assumptions about cost of oil and alternative energy and transport technologies, making reference to the time horizon of the year 2050.
Given the features of the two models, the approach in HOP! was based on the assumption that market mechanisms allow energy supply to cater for energy demand. In particular, the models simulate that supply of alternative energy sources depends on price competitiveness and that investments are directed to alternatives and efficiency technologies such that energy is produced in the requested quantity. Government support of investments in response to high oil prices is not anticipated, though the debate on market failure suggests that designing suitable policies to either channel private investments into the required direction or directly invest public resources should be a major and urgent task for the EU.
There are numerous direct and indirect impacts of high oil prices on the various sectors of the economy, even if focus is to be put only on the most relevant effects. Furthermore, many of the issues are interlinked and some impacts may lead the system to even turn into opposite directions. For instance, the impact of higher costs of energy and transport are expected to be negative on economic growth, whereas investments in alternative energy sources are expected to provide a positive contribution. According to which of the two effects is stronger and faster, the economy can react more positively or negatively. Overall, the final result can hardly be predicted on a qualitative basis and is likely to change over time.
For this reason, an analytical toolbox consisting of the two interconnected models - POLES (including the Biofuels model BioPOL) and ASTRA - is applied to simulate in a consistent way the effects of various scenarios assuming high oil prices, taking into account various feedback loops and the dynamics of impacts. The time horizon of the simulations ends in 2050, the assessment being focused on the EU, as only POLES is a global model.
The POLES model covers the energy field with supply of energy resources on world level, energy demand and development of energy prices with an exogenously given economic development, while the ASTRA model deals with:
i) the transport field with infrastructure supply and transport demand;
ii) the macroeconomic system, with a module that endogenously forecasts economic development under varying policy conditions. The two models are linked as follows:
-ASTRA receives from POLES: fuel prices, the value of investments for developing alternative energy sources and the trade of fossil fuels;
-POLES receives gross domestic product (GDP) development, energy demand for the transport sector and the economic activity per sector from ASTRA.
The simulation of scenarios is an iterative process: POLES starts the simulation to provide starting results for ASTRA, whose interface results are transferred to POLES. Scenario run is then replicated in POLES to produce updated outcomes for ASTRA and so on. At the end of each iteration, results are compared with those of the previous iteration and the process was stopped when in both models differences are sufficiently small. Not all impacts are covered at the same level of detail and that various assumptions are used in the structures of the model. As a whole, the models refer to a world where market is able to generate a peaceful development and where investments ensure economic growth and energy supply or reduce the need for energy. This is the perspective assumed in the HOP! models.
To get a comprehensive picture of the economic impacts, a series of scenarios have been defined and compared with a reference projection. In the reference scenario it is expected that the European economy continues to grow in the coming decades, where growth is measured as the growth of GDP in constant prices. The relative growth rate is expected to be much stronger for the new Member States than for the Member States before the year 2004 (EU-15). For the new Member States an average annual growth of about +2.7 % is expected, while the EU-15 grows by less than half of this speed with about +1.2 %.
With respect to oil reserves and oil production, the reference scenario refers to the optimistic assumptions that stem from the estimation of US Geological Survey (USGS) on the worldwide oil and gas fields. In the case of synthetic fuels and other fuels, it is assumed that they substitute transport fuels. Individuals and freight mobility is expected to increase at different speeds when EU-15 and more recent EU Member States are considered.
The 150 smooth scenario assumes a smoothly increasing oil prices which reaches a level of EUR 150 2000/bbl in 2020. This leads to increased investment in energy efficiency as well as in alternative sources. A carbon value rising from EUR 5/tCO2 to EUR 30/tCO2 is taken into consideration.
- 150 smooth no invest scenario assumes that the level of investments remain more or less the same as in the reference run.
- 150 smooth reduced tax scenario and 150 smooth carbon tax scenario vary the taxation level: a tax reduction by 20 % with the purpose to limit the increase of transport costs is assumed in the former and a carbon taxation raised to EUR 30/tCO2 aiming at higher tax revenues to compensate higher governmental investments is considered in the latter.
- 150 early scenario and 150 late scenario vary the way oil prices increase: in an early step between 2010 and 2012, which enables to look at the impacts of a steep rise of high oil prices right now, and with a late step to look at the impacts if we assume a moderate oil price development, which suddenly turns out to be false.% L- 220 smooth scenario investigates a higher oil prices than HOP! 1 scenario (> EUR 220/bbl in 2020).
- Two last scenarios explore the impacts of extraordinarily high oil prices reached with a step in the year 2020; 600 early assumes a price of EUR 600/bbl in 2020, while 800 early assumes a price of EUR 800/bbl in 2020.
Roughly a 1 % point loss of GDP would amount to a GDP of EU-27 that is EUR 100 billion lower than in the reference. In most scenarios the GDP losses can be observed over at least one or two decades, in some even until 2050. Linking the results with the conclusions of the sensitivity tests it could be that the annual loss of GDP would reach even over EUR 1 trillion for the EU-27.
In terms of employment the numbers are more dramatic: a 1 % point loss of employment amounts to 2 million less employed persons in Europe, which means that even in the less drastic scenarios about 10 million jobs get lost in the EU-27. The expected oil-GDP response to an oil price shock relationship would be, however, less pronounced than those observed for the oil price shocks in the 1970s and 1980s. This is due to the large variety of dampening effects on both the oil price and its economic impact.
If high oil price is one of the critical issues at the global level, climate change is another one. It is important to note that even though investments in oil substitutes can contribute to high global warming, this is not necessarily the case. If, on the one hand, high oil prices would lead to a massive exploitation of unconventional oil resources and the use of coal-based transport fuels (CtL), emissions would rise compared to a reference scenario that is based on conventional oil. On the other hand, a number of technological options can simultaneously decrease oil consumption and lower greenhouse gas emissions. Such options include renewable energies and fuels, and above all, energy savings.
The HOP! results suggest that investments in alternative energy sources and energy efficiency are the key factor for dampening negative impacts of high oil prices. If investments were either not available or too late, the macroeconomic impacts of high oil prices in the EU-27 would be significantly greater. A first policy issue is therefore how to promote investments in the required size either directly through public budgets or by creating incentives that encourage investments of the private sector.
Overall, the conclusion is that oil scarcity and oil price shocks can have significant negative impacts on the EU - but they need not, if the EU prepares itself adequately. A first policy issue is therefore how to promote investments in the required size either directly through public budgets or by creating incentives that encourage investments of the private sector. Looking at the fast decreasing mid-term oil production forecast, the EU should have enough reasons to prepare.
