Nesa identified Issues: Strait of Hormuz
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- Real GDP
- Real income
- Liquid fuel consumption
- Comparison with Singapore product supply shock
Economic modellingThe economic impacts were estimated using Tasman Global, ACIL Tasman’s CGE model. Price movements and elasticity assumptions were fed into the CGE model to determine the aggregate impacts of the price rises on the Australian and world economies. The data bases were converted to allow model runs in weekly time increments for the various scenarios. The economic impacts for the shock scenarios were then compared with the relevant reference or base cases. The cumulative impacts of the disruption (from week 1 to week 23) on Australian GDP and real income are shown in Table ES . Table ES Economic impact from Week 1 to Week 23, relative to the reference case Scenario 1 (7 refineries) Scenario 2 (4 refineries) Case A (Low elasticities) Case B (High elasticities) Case A (Low elasticities) Case B (High elasticities) Australian real GDP
-556 -465 -561 -470 Per cent over 23 week period
-0.087 -0.073 -0.088 -0.074 Australian real income 2012 A$m
-3,118 -2,148 -3,108 -2,141 Per cent over 23 week period % -0.46 -0.32 -0.46 -0.32 Data source: ACIL Tasman modelling. Real GDPThe results show that for Scenario 1, Australia’s GDP is $556 million lower over the 23 weeks under the low elasticities case (case A) and $465 million lower under the high elasticities case (case B). These losses represent –0.087 per cent and –0.073 per cent of GDP that would be produced over the 23 week period respectively. The results for Scenario 2 are not significantly different. This is because firstly, the shock is affecting the crude oil price rather than refinery margins because the price impact is passed through to petroleum products. Secondly, the impacts are estimated relative to a reference case where only 4 refineries are operating. The scenarios are therefore compared to different reference cases. This removes the economic impact of differences in the number of operating refineries on the results. Real incomeAlthough changes in real GDP are useful measures for estimating how much the output of the relevant economies may change, change in the real income of a region is a more relevant measure of the change in economic welfare of the residents of a region. Real income is equivalent to real economic output plus net foreign income transfers, while the change in real income is equivalent to the change in real GDP, plus the change in net foreign income transfers, plus the change in terms of trade, which measures changes in the purchasing power of a region’s exports relative to its imports. Under scenario 1, real income is reduced by $3,118 million over the 23 weeks under the low elasticity case and $2,148 under the high elasticity case. Under scenario 2, real income loss over the 23 weeks is $3,108 million under the low elasticity case compared with $2,141 million under the high elasticity case. These losses represent –0.46 per cent and –0.32 per cent of the real income that would be produced over the 23 week period respectively. The larger projected loss in Australia’s real income compared to the change in real GDP can be attributed to the change in terms of trade arising from the increase in the price of crude oil and petroleum products.1 The larger difference in real incomes under the low and high elasticity cases than arose for GDP can be attributed mainly to the fact that under the low elasticity case, Australia pays higher prices for more crude oil and petroleum products than under the high elasticity case. As a significant proportion of the crude oil and product is imported, the income transfers abroad (via the terms of trade loss) are higher which reduces real incomes.
After allowing for the time it takes to ship crude oil to Singapore, refine crude oil, store and blend sufficient oil products, break-up cargos, and ship crude oil and refined products to Australia, it was estimated that the interruption of supply from Singapore to Australia could last for 45 to 60 days. The incident would temporarily remove around 1.72 per cent of world refinery capacity from the market. ACIL Tasman’s modelling of the Singapore scenario indicated that the total loss in GDP over 4 months would be $1,382 million if the shock occurred in the short term (2011). This is significantly higher than the loss of GDP estimated for closure of the Strait of Hormuz which was calculated to be around $556 million. The total loss in real income in the Singapore case was estimated at $2,145 million if the disruption occurred in 2011. This compares with the real income loss of $2,148 – $3,118 million over 23 weeks for the Strait of Hormuz disruption. The Strait of Hormuz event involves a much larger initial disruption than the extended disruption in the Singapore case (15 million barrels per day compared to 1.3 million barrels per day). However its economic impact, as modelled by ACIL Tasman, is mitigated by a number of factors. While the price spike in week 5 of the case of the Strait of Hormuz is significantly higher than the price increase in the Singapore case, it is a transient event. Most of the time, the elevated prices in the Strait of Hormuz incident are caused by speculative buying before the event and restocking by IEA countries after the event. For most of these weeks, the product price rise is less than that for the Singapore incident. In the absence of the release of IEA stocks in the Strait of Hormuz case, the economic impact would be much higher. A further important difference in the modelling of the economic impacts between the two incidents is the assumption about unemployment. In the Singapore incident, it was assumed that unemployment effects should be taken into account because it extended for sufficient time to allow reduced economic activity to lead to layoffs. By comparison, in the Strait of Hormuz incident it was assumed that there would be no unemployment effects as the duration of the incident was so short and that, in aggregate, the supply of oil was not lost (rather the sources of supply and speculative/precautionary demand changed resulting in short term price effects). Tasman Global was therefore constrained so that the level of employment could not change. If the incident were significantly prolonged, the impact on employment would need to be taken into account. This would be achieved in Tasman Global by removing this constraint. Under such circumstances, the projected loss in Australian real GDP could be expected to be five to ten times greater than the impacts reported in this analysis. Similarly, the change in real incomes could be expected to be two to three times greater. There are other more technical differences in the modelling. ACIL Tasman refined the Tasman Global data base and modelling approach to better simulate the very short term dynamics of the supply shock for the Strait of Hormuz, including the integration of the assumed elasticities in global oil markets and specifying how the oil is supplied (i.e. from standard production or from stock releases).
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