1. XXIV Meeting of the Latin American Network of Central Banks and Finance Ministries The Effect of Oil Prices The Case of the Importers Fidel Jaramillo Inter-American Development Bank Regional Economic Advisor Andean Region and the Caribbean Washington D.C, October 19-20, 2006

2. Oil Shocks: a long-run perspective (1900-2006) US-Dominated Market (-’34) 7 Sisters Agreement (’34-’73)) Arab Oil Embargo (‘74) Iranian Crisis (’79-’81) Kuwait Invasion (’90) Upswing (2000-) Source: Bloomberg, IADB Oil Price (Annual Average, US$/barrel)

3. Current trend has been persistent… Iraq's Invasion of Kuwait Iranian Revolution Yom-Kippur War and OPEC oil embargo 10 11 3 Nº months to peak Episode* Oil Price Variation (month zero to peak) 317% 152% 103% Starting date End date Apr-73 Jan-79 Jan-75 Jun-80 Aug-90Dec-90 22 18 5 Current Shock 29 115%Dec-03n.a.29 Source: Bloomberg, Latin Macro Watch, 2006, IADB.

4. Oil Price Previous Shock* (month of shock = 0) month zero = 100 90 100 110 120 130 140 150 160 170 180 190 024681012141618202224 Current Shock Oil Price 90 110 130 150 170 190 210 Dec-03 Mar-04 Jun-04 Sep-04Dec-04 Mar-05 Jun-05 Sep-05Dec-05 (month of shock = Dec-03) Dec-03 = 100 …explained by a shock of different nature Source: Latin Macro Watch, 2006

5. Price (P oil ) Quantity (q oil ) p 0 oil Supply q 1 oil P 1 oil Oil MarketCommodities Market Demand 0 (Y w 0 ) q 0 oil Price (P c ) Quantity (q c ) p1cp1c Supply p0cp0c Demand (Y w 0 ) q0cq0c q1cq1c Demand Shock Demand (Y w 1 ) Demand Shock Demand 1 (Y w 1 ) Y w = World Output Oil Demand Shocks: A Simple Graphical Analysis Source: Latin Macro Watch, 2006

6. Growth and external sector have been strong… Previous (supply) Shock*Current (demand) Shock *Yom-Kippur War and OPEC oil embargo (Oct-73), Iranian Revolution (Jan-79) and Iraq's Invasion of Kuwait (Aug-90) Source: Latin Macro Watch, 2006

7. Variation …with oil and commodity prices moving together Previous Shock* Previous Shock* (month of shock = 0) *Yom-Kippur War and OPEC oil embargo (Oct-73), Iranian Revolution (Jan-79) and Iraq's Invasion of Kuwait (Aug-90) Current Shock Current Shock (month of shock = Dec-03) 90 110 130 150 170 190 210 Dec-03 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04 Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Metals Beverages Oil Agricultural Raw Materials Food Nº of months after the shock 0123456789101112131415161718192021222324 Oil Foods -13.2% Metals -15.7% +70.5% Agricultural Raw Materials -25.3% Beverages -31.2% Variation Foods Metals Oil +2.5% +72.4% +115.2% Agricultural Raw Materials +0.5% Beverages+22.0% (Oil and commodity prices deflated by US CPI) Source: Latin Macro Watch, 2006

8. Oil demand has been increasing, in particular from non OECD Asia Source: IADB, 2006

9. …while oil supply from OECD has declined Source: IADB, 2006 Incremental Oil Production by region (Thousand of barrels per day)

10. Impact on Latin America and the Caribbean: The case of the net importers Net Oil Exports as a Share of GDP (2004) Net importers  South America Chile Paraguay Uruguay  Central America  Costa Rica  Nicaragua  El Salvador  Caribbean  Barbados  Jamaica  Guyana  Suriname Source: UN Comtrade, World Development Indicators. IADB

11. Most countries have become more energy- efficient… Source:OLADE 2006

12. …but per capita consumption has been increasing Source:OLADE 2006

13. Transport sector is the major oil consumer… Source:OLADE 2006

14. …and has increased its demand significantly Source:OLADE 2006

15. Oil bill is taking toll on imports… Impact External Accounts Growth Fiscal balance Inflation Source: UN Comtrade, World Development Indicators

16. …but external accounts have not deteriorated Source:Word Development Indicators, bloomberg, IMF Current Account (in % of GDP) (due to positive global demand shock…) (due to positive global demand shock…)

17. …although partial effect may be sizeable Source:Word Development Indicators, IADB

18. Oil price impact on real exchange rate (assuming sudden stop of external capital and all other variables constant) Source: IADB 2006

19. So far, current oil price increases have not harmed growth prospects... (also due to positive global demand shock…) (also due to positive global demand shock…) Real GDP Growth Source:Word Development Indicators, Bloomberg, IADB

20. …but vulnerabilities remain …but vulnerabilities remain (impact of a 100% increase in oil prices) Latin America and the Caribbean: Net Oil Importers by Sub-Region* South America Central America Caribbean Countries -1.8% -1.6% -1.4% -1.2% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% * Weighted at PPP adjusted GDP. *Guyana and Jamaica are own calculations using World Bank 2006 methodology Impact of Higher Prices on Economic Growth Source: Assesing the impact of Higher Oil Prices in Latin America. World Bank 2006. Latin Macro Watch, 2006

21. Pass-through to inflation is affecting the region… Source:World Development Indicators * Caribbean Average excludes Suriname Average Inflation per Region

22. …and could have an effect on public finances Source:IMF, EIU, WEO Global Central Government Balance (as a % of GDP)

23. What can we expect…? WTI spot price per barrel ($/b) end of period weekly Historical: 14/1/2000 - 22/9/2006 Forecast: 29/9/2006 - 26/12/2006 52 weeks moving average and possible lower boundary Oil Price Scenario 2000-08 Monthly Oil Stocks for OECD Countries January 2001- May 2006 (Mbbl) Source:Bloomberg, Energy Information Administration, IADB

24. Is there a risk of another supply shock…? Strait of Hormuz Assumptions:* Closing of the Strait of Hormuz in the event of a conflict with Iran A reduction of 20% in oil supplies Demand Elasticity of 0.2 100% rise in oil prices or US$ 130 per barrel * Source: Deutsche Bank, Latin Macro Watch

25. Thanks Fidel Jaramillo IADB, Oct. 19 th, 2006