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Mitigating Vulnerability to High and Volatile Oil Prices : Power Sector Experience in Latin America and the Caribbean

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  • Rigoberto Ariel Yépez-Garcia
  • Julie Dana
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    Abstract

    Countries heavily dependent on imported oil to power a significant portion of their electricity generation are especially vulnerable to high and volatile oil prices. In net oil-importing countries worldwide, high and volatile oil prices ripple through the power sector to numerous segments of the economy. As prices move up and down, so does the cost of electricity production, which has far-reaching effects on the economy, fiscal and trade balances, businesses, and household living standards. High and volatile oil prices affect economies at both a macro and micro level. The major direct effects at the macro level are a deteriorating trade balance, through a higher import bill, reflecting a worsening in terms of trade; and a weakening fiscal balance due to greater government transfers and subsidies to insulate movements in international energy markets. At the micro level, investment uncertainty results from the higher risk of engaging in new projects and associated development and sunk costs, which, in turn, affects policy decisions and economic growth. This study responds to the needs of policy makers and energy planners in oil-importing countries to better manage exposure to oil price risk. The study's objective is threefold. First, it analyzes the economic effects of higher and volatile prices on oil-importing countries, with emphasis on the power sector, using examples from Latin America and the Caribbean (LAC). Second, it proposes a menu of complementary options that can be applied over multiple time frames. Several structural measures are designed to reduce oil generation and consumption, while a range of financial instruments are suggested for managing price risk in the short term. Finally, it attempts to quantify some of the macroeconomic and microeconomic benefits that could accrue from implementing such options.

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    File URL: https://openknowledge.worldbank.org/bitstream/handle/10986/9341/699440PUB0Publ067869B09780821395776.pdf?sequence=1
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    Bibliographic Info

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    This book is provided by The World Bank in its series World Bank Publications with number 9341 and published in 2012.

    ISBN: 978-0-8213-9577-6
    Handle: RePEc:wbk:wbpubs:9341

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    Postal: 1818 H Street, N.W., Washington, DC 20433
    Phone: (202) 477-1234
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    Web page: https://openknowledge.worldbank.org
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    Related research

    Keywords: Macroeconomics and Economic Growth - Markets and Market Access Macroeconomics and Economic Growth - Climate Change Economics Energy - Energy and Environment Energy - Energy Production and Transportation Environmental Economics and Policies Environment;

    References

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    1. Chen, Shiu-Sheng & Chen, Hung-Chyn, 2007. "Oil prices and real exchange rates," Energy Economics, Elsevier, vol. 29(3), pages 390-404, May.
    2. Nicoletta Batini & Eugen Tereanu, 2009. "What Should Inflation Targeting Countries Do When Oil Prices Rise and Drop Fast?," IMF Working Papers 09/101, International Monetary Fund.
    3. Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
    4. Michele Cavallo, 2008. "Oil prices and inflation," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct3.
    5. Hamilton, James D & Herrera, Ana Maria, 2004. "Oil Shocks and Aggregate Macroeconomic Behavior: The Role of Monetary Policy: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 265-86, April.
    6. Rigoberto Ariel Yepez-Garcia & Todd M. Johnson & Luis Alberto Andres, 2011. "Meeting the Balance of Electricity Supply and Demand in Latin America and the Caribbean," World Bank Publications, The World Bank, number 2334, October.
    7. Anderson, Phillip R. D. & Silva, Anderson Caputo & Velandia-Rubiano, Antonio, 2010. "Public debt management in emerging market economies : has this time been different ?," Policy Research Working Paper Series 5399, The World Bank.
    8. AfDB AfDB, . "AfDB Group Annual Report 2005," Annual Report, African Development Bank, number 61 edited by Koua Louis Kouakou, 7.
    9. Ichiro Fukunaga & Naohisa Hirakata & Nao Sudo, 2009. "The Effects of Oil Price Changes on the Industry-Level Production and Prices in the U.S. and Japan," IMES Discussion Paper Series 09-E-24, Institute for Monetary and Economic Studies, Bank of Japan.
    10. Peter Ferderer, J., 1996. "Oil price volatility and the macroeconomy," Journal of Macroeconomics, Elsevier, vol. 18(1), pages 1-26.
    11. Spatafora, Nikola & Warner, Andrew, 1995. "Macroeconomic effects of terms-of-trade shocks : the case of oil-exporting countries," Policy Research Working Paper Series 1410, The World Bank.
    12. Markus Bruckner & Rabah Arezki, 2010. "International Commodity Price Shocks, Democracy, and External Debt," IMF Working Papers 10/53, International Monetary Fund.
    13. Lee, Kiseok & Ni, Shawn, 2002. "On the dynamic effects of oil price shocks: a study using industry level data," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 823-852, May.
    14. International Monetary Fund, 2010. "Fiscal Policy in Oil Producing Countries During the Recent Oil Price Cycle," IMF Working Papers 10/28, International Monetary Fund.
    15. Franz Gerner & Megan Hansen, 2011. "Caribbean Regional Electricity Supply Options : Toward Greater Security, Renewables and Resilience," World Bank Other Operational Studies 2738, The World Bank.
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