Fossil Fuel Prices and the Economic and Budgetary Challenges of a Small Energy-Importing Economy: The Case of Portugal
AbstractThis paper examines the economic and budgetary impacts of fuel prices using a dynamic general equilibrium model of the Portuguese economy which highlights the mechanisms of endogenous growth and includes a detailed modeling of the public sector. The fuel price scenarios are based on forecasts by the US Department of Energy (DOE-US) and the International Energy Agency (IEA-OECD) and represent a wide range of projections for absolute and relative fossil fuel prices. In terms of the long term economic impact, our results suggest a 1.9 percent drop in GDP in the DOE-US scenario and 1.6 percent in the IEA-OECD scenario. As to the budgetary impact, higher fuel prices lead to lower tax revenues, which, coupled with a reduction in public spending, translate into lower public deficits. Accordingly, increasing fuel prices create an important policy trade off in that they can contribute to reducing the public deficit while hindering economic growth. We find that fairly strong incentives for wind energy can reduce the economic impact of fuel prices by 14.2 percent in the DOE-US price scenario and 18.5 percent reduction in the IEA-OECD price scenario. Finally, our results highlight the importance of public sector spending decisions and the mechanisms of endogenous growth in understanding the impact of fossil fuel prices. Indeed, a scenario of higher fuel prices would, with exogenous public decisions and exogenous economic growth assumptions, result in substantially smaller economic effects and yield adverse budgetary effects.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics, College of William and Mary in its series Working Papers with number 115.
Length: 47 pages
Date of creation: 19 Oct 2012
Date of revision:
Fuel Prices; Economic Performance; Budgetary Consolidation; Dynamic General Equilibrium; Endogenous Growth; Portugal.;
Other versions of this item:
- Alfredo Pereira & Rui Pereira, 2013. "Fossil fuel prices and the economic and budgetary challenges of a small energy-importing economy: the case of Portugal," Portuguese Economic Journal, Springer, vol. 12(3), pages 181-214, December.
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
- H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
- H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
- O52 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Europe
- Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Schubert, Stefan F. & Turnovsky, Stephen J., 2011. "The impact of oil prices on an oil-importing developing economy," Journal of Development Economics, Elsevier, vol. 94(1), pages 18-29, January.
- Hamilton, James D., 2003.
"What is an oil shock?,"
Journal of Econometrics,
Elsevier, vol. 113(2), pages 363-398, April.
- Werner Roeger, 2005. "International oil price changes: impact of oil prices on growth and inflation in the EU/OECD," International Economics and Economic Policy, Springer, vol. 2(1), pages 15-32, 06.
- Pedro Duarte Neves & Paulo Soares Esteves, 2004. "Oil Prices and the Economy," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
- Korhonen, Iikka & Ledyaeva, Svetlana, 2010.
"Trade linkages and macroeconomic effects of the price of oil,"
Elsevier, vol. 32(4), pages 848-856, July.
- Korhonen, Iikka & Ledyaeva, Svetlana, 2008. "Trade linkages and macroeconomic effects of the price of oil," BOFIT Discussion Papers 16/2008, Bank of Finland, Institute for Economies in Transition.
- Carlo Carraro & Enrica De Cian & Massimo Tavoni, 2009.
"Human Capital Formation and Global Warming Mitigation: Evidence from an Integrated Assessment Model,"
CESifo Working Paper Series
2874, CESifo Group Munich.
- Carlo Carraro & Enrica De Cian & Massimo Tavoni, 2009. "Human capital formation and global warming mitigation: evidence from an integrated assessment model," Working Papers 2009_30, Department of Economics, University of Venice "Ca' Foscari".
- James D. Hamilton, 2008.
"Understanding Crude Oil Prices,"
NBER Working Papers
14492, National Bureau of Economic Research, Inc.
- Tang, Weiqi & Wu, Libo & Zhang, ZhongXiang, 2009.
"Oil price shocks and their short- and long-term effects on the Chinese economy,"
14703, University Library of Munich, Germany.
- Tang, Weiqi & Wu, Libo & Zhang, ZhongXiang, 2010. "Oil price shocks and their short- and long-term effects on the Chinese economy," Energy Economics, Elsevier, vol. 32(Supplemen), pages S3-S14, September.
- Weiqi Tang & Libo Wu & ZhongXiang Zhang, 2009. "Oil Price Shocks and Their Short- and Long-Term Effects on the Chinese Economy," Economics Study Area Working Papers 102, East-West Center, Economics Study Area.
- Stephen P. A. Brown & Mine K. Yücel, 2001.
"Energy prices and aggregate economic activity: an interpretive survey,"
0102, Federal Reserve Bank of Dallas.
- Brown, Stephen P. A. & Yucel, Mine K., 2002. "Energy prices and aggregate economic activity: an interpretative survey," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(2), pages 193-208.
- Backus, David K. & Crucini, Mario J., 2000.
"Oil prices and the terms of trade,"
Journal of International Economics,
Elsevier, vol. 50(1), pages 185-213, February.
- Wissema, Wiepke & Dellink, Rob, 2007. "AGE analysis of the impact of a carbon energy tax on the Irish economy," Ecological Economics, Elsevier, vol. 61(4), pages 671-683, March.
- Michael Bruno & Jeffrey D. Sachs, 1985. "Economics of Worldwide Stagflation," NBER Books, National Bureau of Economic Research, Inc, number brun85-1, September.
- He, Yanan & Wang, Shouyang & Lai, Kin Keung, 2010. "Global economic activity and crude oil prices: A cointegration analysis," Energy Economics, Elsevier, vol. 32(4), pages 868-876, July.
- João Amador, 2010. "Energy Production and Consumption in Portugal:Stylized Facts," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
- Alfredo Marvão Pereira & Rui M. Pereira, 2013. "Environmental Fiscal Reform and Fiscal Consolidation: The Quest for the Third Dividend in Portugal," Working Papers 114, Department of Economics, College of William and Mary.
- Dale W. Jorgenson, 1998. "Growth, Volume 2: Energy, the Environment, and Economic Growth," MIT Press Books, The MIT Press, edition 1, volume 2, number 0262100746.
- Koetse, Mark J. & de Groot, Henri L.F. & Florax, Raymond J.G.M., 2008. "Capital-energy substitution and shifts in factor demand: A meta-analysis," Energy Economics, Elsevier, vol. 30(5), pages 2236-2251, September.
- Schubert, Stefan Franz, 2009. "Dynamic Effects of Oil Price Shocks and their Impact on the Current Account," MPRA Paper 16738, University Library of Munich, Germany.
- Alfredo M. Pereira & Pedro G. Rodrigues, 2004. "Strategies for Fiscal Reform in the Context of the EMU: the Case of Portugal," Review of Development Economics, Wiley Blackwell, vol. 8(1), pages 141-163, 02.
- Teresa Sousa, 2011. "International macroeconomic interdependence and imports of oil in a small open economy," Portuguese Economic Journal, Springer, vol. 10(1), pages 35-60, April.
- Alfredo Marvão Pereira & Rui M. Pereira, 2012. "DGEP - A Dynamic General Equilibrium Model of the Portuguese Economy: Model Documentation," Working Papers 127, Department of Economics, College of William and Mary.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Daifeng He) or (Alfredo Pereira).
If references are entirely missing, you can add them using this form.