Vulnerability of the EU Economy to Oil Shocks: a General Equilibrium Analysis with the GEM-E3 Model

Juan Carlos Ciscar*, Peter Russ*, Leonidas Parousos **, and Nikos Stroblos** * Institute for Prospective Technological Studies (IPTS)1 ** National Technical University of Athens (NTUA)

Abstract This article presents a comparative statics analysis of the potential impact of oil price rises on the EU economy. The macroeconomic and sectoral effects of such oil shocks are quantitatively assessed for two basic scenarios with the GEM-E3 world model. The first scenario assumes a crisis leading to an increase of 10$ per barrel of oil. The second one consists of a much deeper energy crisis, and translates into a rise of 30$ per barrel of oil. The crude petroleum, petroleum refineries and energy-intensive sectors undergo a significant fall in their value-added. Almost 40% of the overall GDP fall comes from the Other market service sector, while the Trade and Transport sector and the Other equipment goods sector represent each approximately 10% of the overall GDP fall. The GDP losses for the EU as a whole are 0.94% in the first scenario and 2.56% in the second. The macroeconomic impact is slightly lower in the USA (0.81% and 2.21%, respectively). Australia, the FSU, India and Japan have very similar losses to that of the whole EU, while China and Africa experience a bigger GDP drop. The world GDP loss figures are very similar to those of the EU.

(*) We would like to thank especially Nikos Kouvaritakis (NTUA) for his fruitful comments and suggestions. We would also to thank the IPTS colleagues Andries Brandsma, Luis Delgado, Ignacio Hidalgo, Antonio Soria, and Per Sørup, as well as Cristobal Burgos from DG TREN, for their comments.

Directorate-General Joint Research Center. Opinions expressed in this article do not necessarily reflect those of Institute, Directorate-General or the European Commission.

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Table of Contents

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INTRODUCTION.........................................................................................................................3 REVIEW OF PAST OIL-SHOCK EXPERIENCES .................................................................4 2.1 2.2 2.3 2.4 2.5 OIL PRODUCTION DISRUPTIONS AND OIL PRICES .....................................................................4 MACROECONOMIC EFFECTS OF PAST SHOCKS ON THE EU ECONOMY .....................................5 GDP LOSS DUE TO MORE EXPENSIVE OIL IMPORTS .................................................................7 STATISTICAL AND ECONOMETRIC ESTIMATES OF THE OIL PRICE-GDP RELATIONSHIP ............7 MODEL-BASED ESTIMATES OF THE MACRO EFFECTS OF OIL CRISES ........................................8

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METHODOLOGY .......................................................................................................................9 3.1 3.2 3.3 THE GEM-E3 MODEL ............................................................................................................9 DEFINITION OF SCENARIOS ....................................................................................................9 INTERPRETATION, CAVEATS AND LIMITATIONS OF THE METHODOLOGY .............................10

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RESULTS ....................................................................................................................................12 4.1 4.2 4.3 4.4 MACROECONOMIC EFFECTS IN THE EU AS A WHOLE ............................................................12 MACROECONOMIC EFFECTS IN THE EU REGIONS ..................................................................13 SECTORAL EFFECTS IN THE EU AND EU REGIONS ................................................................15 WORLD REGION RESULTS .....................................................................................................19

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CONCLUSIONS .........................................................................................................................20

REFERENCES .....................................................................................................................................21 ANNEX 1. REGIONAL COVERAGE OF THE GEM-E3 MODEL...............................................23 ANNEX 2. SECTORAL COVERAGE OF THE GEM-E3 MODEL...............................................24 ANNEX 3. IMPLEMENTATION OF THE OIL PRICE SHOCKS IN THE MODEL .................29

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The model has been widely used in studies for the European Commission. through changes in relative prices. (2001). in particular. to around 70% in 2030 (European Commission. 2003a) studied the economic consequences of the Iraqi conflict on the economy of the euro area. University of Toulouse. to a significant reallocation of resources within the goods. For instance. partially financed by the JOULE Programme of the European Commission (DG RTD). and involved NTUA as a co-ordinator. The Focus section of the Quarterly Report on the Euro Area (European Commission. In order to analyse such macroeconomic impacts the world General Equilibrium Model for Energy-Economy-Environment interactions (GEM-E34) has been applied. 4 3 2 3 . as already occurred in the 1970s oil shocks2. The design of the scenarios of this exercise has been made jointly by DG TREN C1 and IPTS/JRC. The model computes the equilibrium prices of goods. The model has been successfully peer reviewed by the European Commission in 1998.1 Introduction Nowadays approximately half of the EU energy needs are imported. The GEM-E3 model was constructed by a collaborative project team. including The Review of the Single Market. This entails a significant potential vulnerability of the EU economy to eventual oil price rises. The Evaluation of Energy Taxation. The dependence on external sources of energy supply is expected to rise considerably in the coming decades. capital and labour markets. KUL/CES. GEM-E3 is a computable general equilibrium model of the world economy able to quantify those impacts by using the relevant contributions from economic theory and adequate statistical data bases (based mainly on social account matrixes). For the analysis of the macroeconomic effects of higher oil prices see for instance Hudson and Jorgenson (1978) and Hunt et al. labour and capital that simultaneously clear all markets in the world regions. An increase in oil prices leads both to a real loss of income in the EU and. services. The Double-Dividend Analysis. University of Strathclyde and CORE. The model scenarios have been implemented and run by NTUA. geopolitical instability in the Middle East can alter the world oil market. and others. Similar studies have studied the consequences on the US economy (see Nordhaus (2003) and Perry (2001)). This article addresses the economic consequences on the EU associated to an oil price crisis and. The MacroEconomic Costs for the EU of reaching the Kyoto targets. services. University of Mannheim. quantitatively assesses the potential macroeconomic and sectoral effects of two oil shock scenarios on the EU economy3. 2001). which in turn would significantly affect the EU.

1 Oil production disruptions and oil prices The major cause explaining the 1970s oil crises are exogenous disruptions in world petroleum supply. Section four concludes. 4 . 1970-2001 Oil prices per barrel 80 70 60 50 40 30 20 10 0 1970 C u rre n t $ 1999 $ 1975 1980 1985 1990 1995 2000 Source: BP 2. 1973-1974 and 1979-1980. can be clearly identified.8%. 2 Review of past oil-shock experiences The evolution of oil prices for the period 1970-2001 is shown in Figure 1 both in current and constant (1999 $) terms. Section three analyses the main results. In the first section the past oil shock experiences are reviewed.This article has four sections. in addition to this introduction. Real oil prices quadrupled during the first shock and tripled during the second shock. Section two presents the methodology followed in this article. According to the computations of Hamilton (2003) the drop in world production in the 1973 Arab-Israel war could be estimated to be 7. and 8.9% in the 1978 Iranian revolution. Figure 1. The two oil shocks of the 1970s.

3 72.5 42. As it can be seen. When OPEC countries have succeeded in controlling their supply provided to the world oil market.3% of the proven reserves are in the Middle East. in 2001 OPEC countries supplied 40.9 1979 3. 2003).2 1984 2.0 1982 1 55.4 1981 0. and in particular its degree of coordination in supplying the world oil market.2 Macroeconomic effects of past shocks on the EU economy The effects of 1970s oil price shocks on economic growth have been substantial. they provoked slower economic growth.5 69.7% of world oil production and accounted for 78% of the proven reserves. In general terms. The oil market is difficult to model due to its non-competitive nature. The 1979 Oil shock impact on EU growth GDP growth oil price (%) (1999 $) 1978 3 34.The OPEC cartel controls a large part of the world oil production and most of the proven reserves5. 65. a process of employment destruction and higher inflation rates. The behaviour of the OPEC countries. BP According to BP data (BP.9 48.7 Source: Eurostat. plays a significant role in the determination of the world oil prices.0 1983 1. Table 1. Table 1 and Figure 2 present the case of the 1979 shock. 2.2 1980 1.1 63.5 45. 5 5 .1 1985 2. the cartel has been able to significantly influence prices. the rise in oil prices that took place during 1979 was followed by very low economic growth rates in the 1980-1982 period. higher unemployment.

Table 2 gives the gross inland consumption of oil in the EU and compares it with the net oil imports for the period from 1985 to 1999.0 0. Considerable research work has been done to quantify the apparent negative relationship between oil price and economic growth. The rate of oil dependence 6 .5 0. Some of this research will be summarised below.Figure 2.0 3.5 1.5 GDP growth (%) 3. Figure 3.0 1.0 1978 1979 1980 1981 1982 1983 1984 1985 GDP growth (%) oil price (1999 $) 80 70 60 50 40 30 20 10 0 oil price (1999 $) 5 Figure 3 plots the EU economic growth rates against the real price of oil in the 19762001 period.0 2. The 1979 Oil shock impact on EU growth 4.5 2. it is interesting to recall the actual dependence of the EU on oil imports. EU-15 real growth and real price of oil 1976-2001 80 70 Real price of Oil (1999$) 60 50 40 30 20 10 0 -1 0 1 2 3 4 GDP Real Growth (%) However. before reviewing the empirical evidence on the effects of oil price shocks on the economy.

The Oil Dependence of the EU Economy Oil Consumption Oil Net Imports Oil dependence (%) 1985 511 382 75% 1990 546 460 84% 1991 563 476 85% 1992 571 482 84% 1993 565 467 83% 1994 568 446 79% 1995 576 446 78% 1996 588 465 79% 1997 588 470 80% 1998 601 490 81% 1999 595 458 77% Note: Gross Consumption and Net oil imports in 1000s ktoe Source: Eurostat 2. An increase of 10 dollars in the price of oil would lead.20%. a series of econometric studies has intended to restore the stability of the relationship between oil prices and GDP through non-linear 6 7 See the EU green paper on security of energy supply (European Commission. pointing out the vulnerability of the EU economy to hypothetical future oil shocks in the future6. Therefore.77 dollars. According to Eurostat in 2001 EU net imports of petroleum and petroleum products amounted to 87. which given the share of oil net imports in the EU economy. the fall in GDP due to more expensive imports depress consumer spending. In mathematical terms the log of real GDP is linearly related to the log of the real price of oil 7 . These estimates do not take into account other fundamental effects of oil price shocks that further affect GDP (e. keeping constant the volume of oil imports.has remained relatively high (above 75%) for the whole period. 2. triggering chain effects on the overall economy. in addition to the effects on demand because of uncertainty) and. therefore. This would imply that either a positive or a negative oil shock would affect economic activity by the same magnitude.7 billion Euro. to a fall of 0.3 GDP loss due to more expensive oil imports One immediate effect of higher oil prices is more expensive oil imports.40% of GDP. The average price of the Brent oil was 24.g. Table 2. 2001). with the drop in oil prices in the 1980s GDP did not rise as the noted linear relationship would imply.4 Statistical and econometric estimates of the oil price-GDP relationship The relationship between oil price and GDP appears to have been relatively linear after World War II to the late 1970s7. 0. leads to a fall in GDP.99% of GDP. are to be interpreted as underestimates of the actual impact of an oil price shock on GDP. However. and a 30 dollars increase would reduce GDP by 1.

regardless whether the price increase is sustained10. Concerning the magnitude of the oil price-GDP relationship Jones et al. There are two major channels. 2. stating that uncertainty situations lead to postponement of investment decisions because of the intrinsic irreversibility nature of the investment decisions. The irreversible investment model. 8 9 See e. (2002).specifications. which provokes a supply-driven recession. leading notably to asymmetric responses of GDP to oil price changes8.5% loss of GDP.g. The fall in the consumption and investment components of aggregate demand therefore provokes a recession in the economy.5 Model-based estimates of the macro effects of oil crises The transmission mechanisms through which an oil shock affects GDP are made explicit in economic models. Doubling the oil price would lead to a 5. an oil shock also affects the demand-side of the economy due to the effect of lower income on consumer and business behaviour. that this value of the elasticity implies that a 50% increase in the price of oil would lead to a fall in GDP of 2. Hooker (1997) and Hamilton (2003). See the interesting discussion on this issue in section 5 of Jones et al.055. is of particular significance in this respect. (2002) conclude that the oil price-GDP elasticity for the US economy is around -0. Furthermore. First. The accuracy of the estimated impacts depends of course on the model characteristics12.75%. this being this the cumulative effect on GDP over a 2-year period of a shock in one period only. These studies conclude that increases in oil price affect GDP more than drops in oil prices9. Second. 10 It could be argued. Hamilton (2003) notes that there is evidence suggesting that oil shocks are important because they disrupt spending by consumers and firms on certain key sectors of the economy. The better the transmission channels of the oil shock are modelled. which deals with the IMF´s MULTIMOD and the OECD´s INTERLINK models. 11 12 8 . there is an additional demand-side effect because consumer spending and investment decisions are postponed due to the uncertainty about the future oil prices11. the more reliable are at first the quantitative estimates. applying the arc elasticity concept. an increase in the oil price alters the supply of the economy because of the raise in energy costs.

employment. It is an empirical. national accounts.4 database. household consumption. The model is not stochastic15. Sensitivity analyses in order to assess the robustness of some outputs are of course possible. calibrated to a base year14 using the Global Trade Analysis Project (GTAP) v. 3. The base year of the current version of the model is 1995. At the market real wage labour supply equals labour demand. social policy subsidies. The model covers the major aspects of public finance. and energy use and supply. public finance. One feature of the modelling approach consists of the absence of involuntary unemployment by definition. sectoral activity. for which it formulates their individual economic behaviour and their interactions as demanders and suppliers of goods and services. 9 .3 3. 13 14 15 See Capros et al. The model determines the equilibrium prices and quantities that simultaneously clear all markets. public expenditures and deficit financing. among other endogenous variables. Applying Monte-Carlo techniques for this purpose. including all substantial taxes. The model aggregates the national economies of the world into twenty-one regions.2 Definition of Scenarios The model application implemented compares two cases: Baseline case: basically capturing the current state of the economy. and links them through endogenous trade of goods and services. is almost impossible due to the model size. among which four EU regions. however. taking into account the optimising behaviour of economic agents. The computation of the equilibrium is simultaneous for all domestic markets and their interaction through flexible bilateral trade flows. (1997). trade and their interaction with the environment13. GEM-E3 includes twenty sectors and various economic agents.1 Methodology The GEM-E3 Model GEM-E3 World model is a multi-region applied general equilibrium model of the world economy providing detailed results on macroeconomic variables. balance of payments. The results of GEM-E3 include detailed input-output tables by region. largescale model.

Caveats and Limitations of the Methodology Before discussing the output of the model runs. An oil price rise could be motivated by a real oil supply shortage (induced. The crisis leads to a rise of 10$ per barrel in the world oil price. Information from dynamic models would be needed to give an indication of that adjustment path over time. This equilibrium approach allows taking into consideration not only the direct effect of an oil shock. Assumptions could be made concerning the responses of economic agents (including the government. The time path of the adjustment to the oil price shock is not modelled explicitly. when agents discount or anticipate a possible but not yet accomplished oil shock18. This increase is assumed to be 30$ per barrel. labour and capital. 3. for instance on compensation for the rise in oil prices) that would indeed affect the impact of the shock on the different macroeconomic variables. for instance. Under this scenario there is a sharp rise of oil price. i. 18 The oil price outburst of January-March 2003 would follow this pattern. on a more aggregate level.e. in which supply equals demand in all markets. the higher oil prices implied by the alternative scenarios impose an additional cost to the economy. e. therefore modifying the optimal choices of the economic agents. it is important to remark the following points: 16 17 Annex 3details the implementation of the oil shocks in the model. once all adjustments have occurred17. by a geopolitical crisis) or by an “expected” oil supply shortage. Scenario 2. This is a typical exercise of comparative statics.. the substitution of oil (an input relatively more expensive after the oil shock) for gas and coal and.g.- An alternative case with an increase in the oil price due to geopolitical instability in the Middle East region. The model is explicitly considering the substitution possibilities of the economy as a whole. Two scenarios of interest have been studied16. 10 . The differences between the baseline and the alternative case are the consequences of the oil price change. but also the indirect and feedback effects between markets (multi-sectoral approach). In particular. Scenario 1. the substitution of energy (a comparatively more expensive production factor) by other factors.3 Interpretation. International oil markets anticipated for a relatively long period the possibility of an oil shortage due to the crisis in the Gulf. The resulting prices and quantities characterise the new equilibrium. The causes behind the oil price increases are not addressed in this paper.

of which approximately 30% could be attributed to the rise in oil prices and the rest to the fall in confidence. rise in risk premium in financial assets. 19 The worse case scenario of the 2003 Spring Economic Forecast (European Commission. due to this non-addressed inefficiency costs. Therefore it could be interpreted that if the actual price increase in oil prices is for instance half the size of the assumed in scenario 1. Yet the experience of the previous oil shocks indicates that because of market imperfections and rigidities (particularly in labour markets) the actual macroeconomic impacts may be higher than those given here. The model gives insights on the order of magnitude and sign of the evolution of economic variables if there were an oil shock and if the economy adjusted completely to the new oil prices. such as the effects due to the increased uncertainty faced by economic agents (decision to postpone investment and consumption decisions. 2003b) would lead to a fall of GDP of almost 1% in the euro area according to the QUEST model. The results of the model runs are not predictions or forecasts.• It is important to take into account the essence of the general equilibrium approach in what concerns the interpretation of the results. etc). the rise in the risk premium and financial stress. The shock takes place in a certain year and the measured results all are defined in annual terms. not considered explicitly in the model19. This proportionality principle can be applied because the production functions are constant-elasticity of substitution (CES ) type and log-linear. • • The model is formulated and solved in real terms. The results in the alternative scenarios are always interpreted in relative terms. 20 11 . • In the model runs the oil shock affects the economy through its effect on the oil price (substitution and income effects). The equilibrium paradigma in economic theory is being assumed. • The results to can be interpreted in time-proportional terms in the following sense. • No changes of economic policy in response to the oil shock have been assumed. the effect on GDP would be half the estimated one20. • It should be noted that the applied model assumes full market flexibility and optimal behaviour of economic agents. but in addition there are other transmission mechanisms. as changes or differences with regard to the baseline scenario. Monetary and financial issues are not considered.

In scenario 1 GDP in the EU falls by 0.39%). The consumption possibilities of households decrease. exports diminish mainly because of the global economic slowdown (world GDP falls by 0. respectively). under the new equilibrium the employment level is slightly higher than in the baseline case. This reflects the impoverishment effect caused by the energy shock.16% -1. oil.63% 0. and during the 19902002 period 2.54% in scenarios 1 and 2. In this case. GDP falls in the EU by 2.93% and by 2. Since labour becomes relatively cheaper than oil as a production factor.45% -3. the main component of GDP.83% -2. This GDP loss is close to the long-term annual economic growth (in the range of 2 to 3%)22. Regarding the trade flows.39% -0. Table 3. Indeed.14% -1.83% -0. in current terms. Macroeconomic Effects on the EU Scenario 1 Scenario 2 GDP Private Investment Private Consumption Exports in volume Imports in volume Employment -0.94% -0.98%.59% 0. 21 22 This represents approximately 84. From the aggregate demand perspective. the sign of the effects is the same but the intensity much higher. 12 .1 Results Macroeconomic effects in the EU as a whole The macroeconomic effects of the two scenarios. the fall in GDP has its main origin in the diminution of the productivity of the production factors in the economy. has become more expensive and this provokes a GDP loss because the level of production of the baseline case cannot be attained.56% -0.03%.08% With respect to scenario 2. and private consumption by 3. Imports also diminish due to the lower GDP level.6 billion Euro.03% -2.94%21. as compared to the baseline or reference case are shown in Table 3.4 4. the GDP loss is mainly caused by a fall in private consumption (which diminishes by 1.56%. A basic production factor. EU real average economic growth in the 1961-2002 period has been 2.83%. due to the fall in real wages.

00% -0.72% -0.91% -0.43% 0. The UK region seems to be the one relatively least affected by the energy shock.70% 0.00% -2. Sweden and Finland) and the rest of EU countries (OEU region).50% -0.17% 0.02% -2.05% -0.09% -1.47% -3.83% 0.39% -0.17% -1.44% -2.15% -1.38% -1.31% 0.4.27% -0.00% -0. Table 4. which could be explained by its oil resources. Macroeconomic Effects on the EU Regions Scenario 1 OEU D UK NEU OEU Scenario 2 D UK NEU GDP Private Investment Private Consumption Exports in volume Imports in volume Employment -1. UK.24% -2.21% -1.57% -0.47% -0.34% -0.70% 0.88% -0. by using the following standard national accounts identity: GDP= Consumption + Investment+ Public expenditure + Exports – Imports Table 5 presents the results of such decomposition. 13 . OEU= other EU countries The impact of the oil shock on GDP can be decomposed into the various aggregate demand components of GDP.57% -0.57% -0.83% -0.39% -3.59% -4. while Germany (D) and the other EU countries (OEU) region are the most affected.96% 0.91% -0.06% -1.10% -2. S.87% 0.91% -3.59% -1.2 Macroeconomic effects in the EU regions Table 4 presents the macroeconomic effects for the four EU regions of the model: Germany (D).03% -0.25% -0.34% -0.11% -2.43% -1.11% -1. FIN.64% -1.06% Note: NEU= DK. NEU region (composed of Denmark.

the contribution of external trade is negative in both scenarios. the intra-EU trade is visible in the form of export and import flows for the single-country regions of the model (Germany and UK) and to a lesser extend in the NEU and REU regions (composed of three and ten countries respectively)" 14 . In particular. 23 The role played by the model disaggregation of the EU into four regions should be taken into account. OEU= other EU countries In the OEU and UK regions most of the GDP fall is explained by the behaviour private consumption23. With regard to the contribution of public expenditure it is zero. With regard to the D and NEU regions. Shares of GDP losses by Demand Component Scenario 1 Private Consumption Private Investment Public Expenditure Exports in volume Imports in volume GDP Scenario 2 Private Consumption Private Investment Public Expenditure Exports in volume Imports in volume GDP OEU D UK NEU EU total 108 4 0 11 -24 100 OEU 62 2 0 44 -8 100 D 100 3 0 22 -24 100 UK 68 3 0 42 -13 100 NEU 91 3 0 24 -18 100 EU total 111 5 0 9 -25 100 63 2 0 43 -8 100 99 3 0 22 -23 100 69 3 0 41 -13 100 92 3 0 23 -19 100 Note: NEU= DK. S. the fall in imports approximately mitigate a quarter of the overall GDP contraction. explaining around 5% of the GDP fall. the contribution of private consumption is lower than in the OEU and UK regions. This is indeed reflecting the competitiveness loss of the EU due to the oil price rise.Table 5. by definition since it is assumed that public expenditure policy does not change after the shock. For the EU as a whole the contribution of the fall in exports to the overall GDP fall is around 25%. FIN. When the fall in imports is taken into account. Moreover. and remains the same across all cases and scenarios.

Table 6.82% -3.21% -3. compared to the baseline. The oil price shock is at a first stage affecting mainly the oil-related sectors.10% 0.50% 0.4.12% 0.34% -2.Manufacture of Gas Electricity Ferrous and non ferrous metals Chemical Products Other energy intensive Electronic Equipment Transport equipment Other Equipment Goods Other Manufacturing products Construction Food Industry Trade and Transport Textile Industry Other Market Services Non Market Services Crude Petroleum Natural Gas Production Table 7 gives the change of unit costs of production per sector and EU region in the 24 The definition and sub-sectoral coverage of the 20 sectors of the GEM-E3 model is provided in Annex 2.52% -1.58% -1.3 Sectoral effects in the EU and EU regions The sectoral24 effects of the oil shock are given in Table 6.86% -2.87% -6.68% -1. the shock in transmitted to the rest of the economy through a series of market adjustments. both supply (firm decisions) and demand (household decisions) factors lead to a relative shift in the sectoral value-added of the economy towards less oil-intensive sectors.16% -3.59% -1.36% 0.97% -2.23% -1.29% 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Agriculture Coal Petroleum Refineries Distribution of Gasseous Fuels . The change in valueadded of each sector.05% -2.10% -5.56% -1.19% -0.17% -3.81% -0.41% -1.13% -0.93% -2. is in fact offering an interesting perspective of the major sectoral adjustment processes taking place in the economy.84% -2.32% -3.15% 0.19% -1. Sectoral Effects in the EU (change in value-added) Scenario 1 Scenario 2 -1.93% -5.48% -3. 15 .85% -0.62% -0.29% -1.20% 0. but due to the interlinkages between the economic sectors.26% -6.42% -8. In general terms.30% -0.83% -0. The results presented below give the situation once those adjustments have taken place in the new equilibrium.

as can be seen in Table 6. As can be seen in Table 7 their unit costs rise quite less than those of oil products. because of the rounding effect. lead to a significant drop in the economic activity of the two oil-related sectors. it might be of interest to give a closer look at the shares of each sector in the GDP loss provoked by the oil shock. showing the productivity fall in the production factors of the economy. health and education) is relatively little affected by the shock and. Indeed. The Other market services sector value-added drops more than total GDP. Those higher unit costs. its unit costs rise by the lowest rate. those with higher oil-intensity experience a higher relative drop in value-added. The coal and gas sectors (number 2.g. With regard to the industrial sectors. Other manufacturing products and the Food industry are those most relatively affected by the oil shock. The Nonmarket services sector (composed mainly by the public sector services e. indeed. In scenario 1 Crude petroleum unit costs rise by 30%. Unit costs increase in all sectors. and Petroleum refineries costs rise by 13%. Table 825 represents the sectoral shares of GDP in the base year (baseline) and the shares of GDP losses in the two scenarios for the four EU regions of the model. In both scenarios the highest increases in unit costs are located in the oilrelated sectors. as well as the relative change in costs vis-à-vis other primary fuels. The Ferrous and non ferrous metals sector. due mainly to the substitution effect among the primary fuels. 16 . In this respect. 4 and 20) on the contrary see an improvement in their value-added in both scenarios. The following results for the whole EU can be remarked: 25 Note that in Table 8 zero numbers do not mean necessarily imply zero share. while the Trade and Transport sector and the Other equipment goods sector represent each approximately 10% of the overall GDP fall. induced by the oil price shock. relative to the baseline.two scenarios. The Construction sector (with low exposition to external competition) experiences a relative contraction slightly below that of GDP. almost 40% of the overall GDP fall comes from this sector. as well as for the EU as a whole.

9% 1.7% 2. S.7% 2.5% 3.1% 3.3% 2. Other Equipment Goods.7% 1.7% 4.1% 5.2% 1.7% Note: NEU= DK.9% 5.8% 41.9% 30. Chemical Products.4% 5.8% 4.9% 13.0% 4.5% 3. Petroleum Refineries.3% 1.8% 1.5% 3.6% 3. Change in Unit costs of production per sector and EU region Scenario 1 OEU D UK NEU OEU Scenario 2 D UK NEU 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Agriculture.6% 3.9% 9.6% 2.5% 1.8% 2.6% 1.5% 21.3% 1.2% 1.3% 4.9% 13.7% 1.9% 15.3% 1. OEU= other EU countries 17 .7% 4.Manufacture of Gas.1% 1.0% 2.0% 1.5% 6. 1.1% 3.6% 1.3% 1.8% 3.9% 4.4% 1.1% 53.6% 4. Textile Industry.5% 1.1% 1.3% 1.8% 1. Other Manufacturing products.3% 1.1% 4.2% 4.4% 90.9% 4.4% 1.8% 4.7% 6.3% 40.3% 1.0% 1. Other energy intensive.5% 3.5% 1.2% 8.3% 1.9% 1.9% 4.2% 30.5% 2.4% 13.5% 1.6% 1.7% 30.0% 3.7% 3.6% 30.8% 1.4% 3.Table 7.3% 90. Non Market Services.0% 3.3% 5.5% 1.9% 3.2% 4.4% 1.6% 4.2% 3.7% 3.5% 3.8% 1.9% 6.5% 3.6% 4. Ferrous and non ferrous metals.1% 0.3% 1.5% 3.2% 6.7% 4.9% 4.6% 1.3% 4. Distribution of Gasseous Fuels .2% 2.5% 1.6% 3. Transport equipment.4% 4.6% 4. Natural Gas Production.3% 4.0% 1. Trade and Transport.7% 1.5% 5.4% 4. Crude Petroleum.2% 4.7% 1.4% 1. Electricity.3% 1.2% 4.6% 1.0% 0.6% 16. Food Industry. Other Market Services.5% 3.2% 1.1% 3.3% 3.8% 17.9% 7. FIN.3% 1.3% 9.6% 1. Electronic Equipment.0% 4.5% 2.3% 1.8% 90.0% 4.2% 90.4% 49.2% 1.1% 0.9% 1.5% 5.2% 1.4% 4.8% 1.5% 1.6% 1.6% 1.3% 1.8% 4.4% 1.4% 3.3% 2.4% 1. Construction.5% 5.6% 4. Coal.3% 2.3% 4.6% 3.

6 0.0 2.2 0.8 1. 19 Crude Petroleum.2 4.8 10.0 100.2 1.3 33.5 1.9 0.1 4.0 0.4 1.1 5.8 38.4 5.1 4.4 2.0 0.3 2. 20 Natural Gas Production.4 5.0 6.0 100.1 1.3 2.9 1.0 0.8 -0.0 2. 06 Ferrous and non ferrous metals.8 3.8 -0.0 32.2 0.1 0. 15 Trade and Transport.7 2.7 1.3 3.3 1.4 3.5 2.9 0. 13 Construction.0 3.1 3.4 6.0 1.3 3.4 0.6 3.3 23.8 6.0 -0.1 0.2 1.2 6.9 2.Table 8.0 100.4 0.2 2.3 3.4 10.7 5.0 100.2 1.1 UK 1.2 5.0 0.6 0.8 5.7 1.6 6.3 3.6 3.4 1.6 3.0 01 Agriculture. 05 Electricity.7 4.0 -0.0 100.7 0.8 10.6 3.0 Note: NEU= DK. 09 Electronic Equipment.9 1.8 8.4 2.9 17. 10 Transport equipment. FIN.2 1.1 0.0 2.0 1.1 0.5 3.5 1.2 2.1 UK 2.2 2.0 1.0 100.0 0.9 17.0 0.3 0. 02 Coal.7 2.7 -0.8 1.1 0.2 7.0 4.0 0.1 7.3 -0.2 2.1 6.4 1.8 -0.3 2.2 100. 11 Other Equipment Goods.5 5.4 6.5 6.5 0.8 5.5 0.4 2.3 0.0 4. 16 Textile Industry.0 100. 18 Non Market Services.8 4. 03 Petroleum Refineries.0 37.5 0.2 1. 12 Other Manufacturing products.1 -0.0 D 2.0 32.0 4. 08 Other energy intensive.6 15.4 1.9 5.8 1.5 3.4 3.6 7.3 1.7 5. OEU= other EU countries 18 .4 1.5 0.8 4.0 100.0 3.1 1.7 5.7 3.2 1.8 1.9 -0.6 1.0 100.1 0.0 6.8 10.2 15. 17 Other Market Services.0 OEU EU total 3.6 4.7 2.7 9.4 2.4 3.2 3.1 0.8 2.5 15.4 0.9 5.4 16.2 3.6 30.3 33.0 -0.6 6.0 100.1 21.0 0.5 1. 04 Distribution of Gasseous Fuels . Sectoral Shares of GDP losses in the four EU regions and the EU SHARES of GDP BASELINE OEU D 2.4 2.1 0.8 9.2 2.0 37.2 100.0 3.1 1.9 2.9 0.2 3.4 6.0 1.1 14.1 1.0 0.0 2.8 24.0 0.2 1.8 2.1 6.2 0.4 5.6 7.0 OEU EU total NEU 3.0 D 2.8 0.6 9.6 1.3 6. 14 Food Industry.9 18.8 4.0 2.3 1.3 3.5 6.1 -0.7 -0.3 2.4 18.0 0.1 23.5 24.7 2.1 0.3 47.7 1.5 7.6 1.0 2.3 1.9 2.0 3.Manufacture of Gas.2 1.0 100.2 2.3 1.7 18.0 0.6 7.1 23.3 4.0 -0.2 5.6 16.8 5.7 9.2 2.7 -0.3 1.0 0.6 5.1 0.1 2.2 0.4 1. Total 1.5 0.5 10.0 1.7 0.8 5. 07 Chemical Products.1 9.0 100.3 3.7 16.7 1.2 0.3 0.6 NEU EU total NEU 5.0 100.2 1.3 2.7 0.1 19.2 1.1 5.5 6.9 1.5 4.2 47.4 0.1 0.4 22.0 1.7 2.0 0.4 3.5 9.2 1.0 6.6 1.1 0.1 SHARES of GDP LOSS Scenario 1 Scenario 2 UK 1.2 2.4 4.2 0.8 1.9 10.1 3. S.3 0.4 2.0 6.4 1.3 2.8 2.7 0.6 0.7 8.4 0.0 0.

2 to 1.5% in both scenarios.4%). absorb 8. • The primary energy and transformation sectors (Coal. This is explained by the evolution of its unit costs of production. Distribution of gaseous fuels and manufacture of gas. The equipment goods might be longer used.2% of GDP in the base year. The Distribution of gaseous fuels and manufacture of gas sector is the only sector in the economy enjoying an improvement. respectively. of the same kind as those seen in the previous subsections. 4. For brevity. On the contrary. and therefore later replaced.7% of GDP in the baseline.2% and 0. Table 9 reports the results on the GDP for some world regions and on the world 19 . Petroleum refineries. Indeed. while it represents 30. for the seventeen non-EU regions.3%).• The oil shock seems to affect significantly the demand for private services. and proportionally to their share in GDP. contributing positively to the GDP of the economy by 0. approximately 37. the trade component is relatively less sensitive to such shock. which account all together for 7.4 World region results The GEM-E3 world model provides with macro and sectoral results. While the demand for transport services component is much affected by the oil price shock. While it represents 1% of GDP. This might be due to the composition of this sector. The Ferrous and non ferrous metals sector is the one that undergoes the highest relative impact.7%). • Energy-intensive sectors (the Ferrous and non ferrous metals. in a context with higher energy prices. Chemical products and Other energy intensive sectors). a very similar figure to their joint participation in GDP (48. and have a very similar share in GDP (1. • The third sector in importance according to the share in the overall GDP fall is the Other equipment goods sector.5% of GDP in the baseline. the Trade and transport sector is relatively less affected by the oil shock: representing 18. Crude petroleum and Natural gas production) account for very little of the overall GDP fall (in the range of 1. almost half (47% to 48%) of the overall fall in GDP in both scenarios is located in the Other market services and Trade and transport sectors. it absorbs 10. Its production increases.2% of overall impact in GDP. it absorbs 2% of the GDP fall. With regard to the Other market services sector.2% of the GDP fall. While it accounts for 6% of GDP in the baseline. which rise at the highest rate among the industrial and service sectors.1 % of the overall GDP fall in scenarios 1 and 2. it is the sector absorbing the highest share of the GDP loss. it represents around 10% of the GDP loss in both scenarios.

20 . while China and Africa (very vulnerable because of their lack of domestic oil resources and.84% -0.35% -0.11% -0. Indeed.93% -2. Compared to the impact on the EU as a whole.86% -1. oil price increases produce a major effect on economic growth. Australia.90% -0.47% -2.83% -1.93% -2.91% -3.75% -2.77% Scenario 2 -2.00% -0.21% -2. in spite of such low figure. around 75% of oil consumption is imported from abroad. due to the essential role played by oil in the economy. However. 26 See Annex 1 for the country coverage of each region of the model.32% -2.72% -2.91% -0.54% 5 Conclusions Oil imports in the EU account for approximately 1% of GDP.81%.91% -0.05% -0. for the case of China its fast economic growth) experience a much bigger GDP drop.economy26.30% -2.94% in the EU). for scenario 1 the USA (with a significant domestic oil production) has a lower GDP loss (of 0. Effects on GDP of World Regions Scenario 1 Australia and New-Zealand Japan China and Hong Kong India South Asia South-East Asia USA Canada Mexico and Brazil Latin America Nordic EU (NEU) Germany UK Other EU (OEU) Other European countries Central Europe Africa Rest of the World WORLD -0.06% -1.53% -2.38% -2.56% -2.97% -1.90% -0. The same happens for scenario 2.72% -2.94% -0.88% -1. India and Japan have very similar losses to that of the whole EU.62% -2. compared to a 0.88% -0. The world GDP loss figures are very similar to those of the EU. Table 9.81% -0.39% -2.11% -0.38% -3.53% -2.27% -2. which makes the EU particularly vulnerable to possible energy crises.

The GDP losses for the EU as a whole are 0. BP statistical review of world energy 2002. 363398. Isard P. 21 .gov/pubs/feds/1997/199756/199756pap. Two scenarios have been considered.An analysis of the potential impact of oil price rises on the EU economy has been conducted applying the GEM-E3 world model.bp.federalreserve. “Energy Prices and the U. The second one consists of a much deeper energy crisis. “The Macroeconomic Effects of Higher Oil Prices”..asp Capros P.. such as China.com/centres/energy2002/index. Available at http://www.eu. and D.html European Commission (2003a). “Spring 2003 Economic Forecasts”.gr European Commission (2001). “What Is an Oil Shock?” Journal of Econometrics. No. Hooker. and D. Laxton (2001). D (2003). pp. et al. respectively). References BP (2003). Directorate-General for Economic and Financial Affairs. A. “Quarterly Report on the Euro Area”.ntua.94% in the first scenario and 2.int/comm/energy_transport/en/lpi_lv_en1.56% in the second. S. I/2003. International Monetary Fund working paper. European Commission (2003b).pdf Hudson E. To be published as European Economy nº 2/2003. The GEM-E3 Model for the European Union”. WP/01/04. (1997). Emerging economies. 113. “The GEM-E3 model: Reference Manual. The first scenario assumes an increase of 10$ per barrel of oil. Natural Resources Journal. Available at http://europa. Directorate-General Energy and Transport.e3mlab. and translates into a rise of 30$ per barrel of oil. The Federal Reserve Board. W.81% and 2. (1997). seem to be relatively more vulnerable to the shock than advanced OECD economies. Available at http://www. Downloaded from http://www. The macroeconomic impact of the oil shocks is slightly lower in the USA (0. Economy 19721976”. Finance and Economic Discussion Series 1997-56.S. “Exploring the Robustness of the Oil Price-Macroeconomy Relationship”. Directorate-General for Economic and Financial Affairs. Hunt B. vol. Hamilton. M. Green Paper: Towards a European strategy for the security of energy supply. Jorgenson (1978). National Technical University of Athens.21% for the two scenarios.

ed.D. K.E. “War with Iraq.pdf Nordhaus D. and Steinbruner J. Consequences and Alternatives”. Aberdeen. “Economic Consequences of a War with Iraq. June 26-29.gov/IAEE_2002_oil_macro_paper_rev2. P. and I.edu/views/papers/perry/20011024. 24 October 2001. Perry. Leiby. "Oil Price Shocks and the Macroeconomy: What Has Been Learnt since 1996".W. published in Kaysen C.brook. Malin M. L.. Costs. G.” Brookings Institution. American Academy of Arts & Sciences. Scotland.ornl.. “The War on Terrorism. Document available at: http://pzl1. (2003).W.D.htm.Jones. D. Nordhaus W. Paik (2002). available at http://www.B. Proceedings of the 25th Annual IAEE International Conference. (2003).. 22 . the World Oil Market and the US Economy. Miller S.N. (2001).. Analysis Paper #7.

. Tajikistar. Kyrgyz. Jordan. Sweden Germany UK Austria. Honduras. FSU Kazakstan. Vietnam. Dominican Republic. Netherlands. El Salvador. Belarus. Barbados. Ecuador. Haiti. Suriname. Pakistan. Azerbaijan. Latvia. Guyana. Greece. Switzerland Bangladesh.Annex 1. Malaysia. Moldova. Bolivia. Israel. Finland. Colombia. Morocco Middle East Africa Rest of the World Bahrain. Turkmenistan. Bhutan. Indonesia. Uruguay. Tunisia. Iraq. Syria. Uzbekistan South Mediterranean and Turkey Turkey. Bahamas. Ukraine. Latin America Netherlands A. Paraguay Czech Republic. HongKong India USA Canada Denmark. Panama. Poland. Kuwait. Nicaragua. Egypt. New-Zealand Japan China. Oman. Libya. Maldives. Portugal. Trinidad. Lithuania. Lebanon. Romania. Thailand. Cuba. Bulgaria Russia. Georgia. Singapore. Guatemala. Central Europe Hungary. Qatar. Armenia. Luxemburg. Regional Coverage of the GEM-E3 Model Name of Region Australia and New-Zealand Japan China and Hong Kong India USA Canada Nordic EU Germany UK Other EU Other European countries South Asia South-East Asia Countries included Australia. Brazil Argentina. Spain Iceland. Iran. Saudi Arabia. Arab Emirates. Ireland. South Korea Mexico and Brazil Mexico. Norway. Peru. Yemen rest of African countries rest of the World countries 23 . Belgium. Italy. France. Costa Rica. Nepal. Chile. Belize. Slovak. Slovenia. Venezuela. Estonia. Algeria. Jamaica. Sri Lanka Philippines.

ƒ Raw milk. 06 Ferrous and non ferrous metals. sheep and goats.Annex 2. ƒ Coal mining. ƒ Casting of non ferrous metals. ƒ Forestry. ƒ Crops n. collection and distribution of electricity. horses. 07 Chemical Products. ƒ Oil seeds. ƒ Bovine cattle. ƒ Manufacture of miscellaneous products of petroleum and coal (briquettes only). ƒ Servicing production of grains. ƒ Plant based fibers. ƒ Manufacture of Gas.c. ƒ Production. distribution of gaseous fuels through mains. ƒ Manufacture of basic chemicals. silk-worm cocoons. ƒ Petroleum refineries (except LPG). 05 Electricity. ƒ Petroleum refineries (LPG only). ƒ Manufacture of other chemical products. ƒ Agriculture and livestock production (paddy rice only). 03 Oil. 02 Coal. ƒ Animal products n. Sectoral Coverage of the GEM-E3 Model 01 Agriculture. ƒ Manufacture of basic precious and non ferrous metals. ƒ Fishing. ƒ Manufacture of rubber and plastic products.c. ƒ Manufacture of miscellaneous products of petroleum and coal (except briquettes). ƒ Grains except wheat and rice. ƒ Processing of nuclear fuel. ƒ Vegetables fruits and nuts. ƒ Wheat ƒ Servicing wheat production only. ƒ Agriculture Services (servicing paddy rice production only). ƒ Manufacture of basic iron and steel. ƒ Casting of iron and steel.e.e. ƒ Wool. 04 Gas. 24 .

ƒ Manufacture of agricultural machinery and equipment. ƒ Iron ore mining. lime and paster. ƒ Salt mining. ƒ Manufacture of professional and scientific and measuring and controlling equipment n. ƒ Manufacture of metal and wood working machinery. tv and communication equipment and apparatus. ƒ Manufacture of pottery. trailers and semi trailers. ƒ Manufacture of photographic and optical goods. ƒ Manufacture of watches and clocks.c. ƒ Manufacture of containers and boxes of paper and paperboard.e. ƒ Manufacture of electrical and industrial machinery and apparatus. ƒ Manufacture of structural clay compounds. hand tools and general hardware. computing and accounting machinery. ƒ Printing publishing and allied industries. ƒ Manufacture of non metallic mineral products. ƒ Manufacture of fabricated metal products except machinery and equipment n. ƒ Manufacture of motor vehicles. ƒ Manufacture of electrical appliances and house wares. ƒ Manufacture of office. ƒ Mining and quarrying n.e. ƒ Manufacture of structural metal products. ƒ Chemical and fertiliser mineral mining. ƒ Manufacture of other transport equipment. accounting and computing machinery. clay and pits. ƒ Manufacture of radio. china and earthware.e.c. ƒ Stone quarrying. ƒ Manufacture of pulp.c.08 Other energy intensive. ƒ Non ferrous ore mining. 10 Transport equipment. ƒ Manufacture of glass and glass products. ƒ Manufacture of electrical apparatus and supplies n. paper and paperboard articles n. ƒ Manufacture of furniture and fixtures primarily of metal. ƒ Manufacture of pulp. ƒ Manufacture of radio.c. ƒ Manufacture of cutlery.e.c. tv and communication equipment and apparatus. ƒ Manufacture of cement. 11 Other Equipment Goods. 25 . ƒ Manufacture of special industrial machinery and equipment except metal and wood working machinery. paper and paperboard. ƒ Machinery and equipment except electrical n. ƒ Manufacture of office.e.c. 09 Electronic Equipment. ƒ Manufacture of engines and turbines.e.

rectifying & blending spirits. planing and other wood mills. cafes and other eating and drinking places. ƒ Manufacture of food products n. ƒ Manufacture of dairy products. ƒ Retail trade.c.e. ƒ Wine industries. horse meat prods. ƒ Urban. ƒ Manufacture of furniture and fixtures except primarily of metal. ƒ Canning and preserving of fruits and vegetables. 14 Food Industry. ƒ Other passenger land transport. 13 Construction. 15 Trade and Transport. ƒ Restaurants. ƒ Vegetable oils and fats. ƒ Grain mill products (processed rice only). ƒ Pipeline transport. ƒ Freight transport by road.e. ƒ Manufacture of industries n. ƒ Manufacture of sporting and athletic goods. ƒ Wholesale trade. 26 . ƒ Sugar factories and refineries. preserving & processing of fish. crustaceans and similar foods. ƒ Manufacture of musical instruments. ƒ Bovine cattle.c. ƒ Canning. suburban and interurban highway passenger transport. ƒ Manufacture of bakery products. ƒ Tobacco manufacturers.c. ƒ Grain mill products (except processed rice). ƒ Meat products. ƒ Manufacture of wood and cork products n.12 Other Manufacturing products. ƒ Railway transport. camps and other lodging places. ƒ Soft drinks & carbonated waters industries. chocolate and sugar confectionery. ƒ Manufacture of wooden and cane containers and small cane ware. ƒ Sugar. ƒ Manufacture of cocoa. sheep and goat. rooming houses. ƒ Manufacture of prepared animal feeds. ƒ Hotels. ƒ Malt liquors and malt. Manufacture of vegetable and animal oils and fats. ƒ Distilling. ƒ Manufacture of jewelry and related articles. ƒ Sawmills.e.

ƒ Air transport carriers.ƒ Supporting services to land transport. ƒ Machinery and equipment rental and leasing. 17 Other Market Services. ƒ Accounting. ƒ Theatrical producers and entertainment services. auditing and bookkeeping services. ƒ Legal services. except machinery and equipment rental and leasing. ƒ Motion picture distribution and production. 16 Textile Industry. ƒ Financial Services. 27 . ƒ Manufacture of wearing apparel. ƒ Authors music composers and zoological gardens. handbags. architectural and technical services. manufacture of luggage. ƒ Other financial institutions. ƒ Data processing and tabulating services. ƒ Other repair shops. clock and jewelry repair. saddlery. dressing and dyeing of fur. ƒ Insurance. ƒ Radio and television broadcasting. ƒ Laundries. ƒ Electrical repair shops. ƒ Monetary Institutions. ƒ Communication. ƒ Engineering. ƒ Inland water transport. laundry services and cleaning and dyeing plants. ƒ Real estate. ƒ Manufacture of man-made fibers. ƒ Storage and warehousing. ƒ Advertising services. ƒ Domestic services. and other cultural services. ƒ Supporting services to water transport. ƒ Ocean and Coastal transport. ƒ Amusement and recreational services. harness and footwear. ƒ Tanning and dressing of leather. ƒ Watch. ƒ Manufacture of textiles. ƒ Repair of footwear and other leather goods. ƒ Business services. ƒ Motion picture production. ƒ Supporting services to air transport ƒ Services incidental to transport. ƒ Repair of motor vehicles and motorcycles.

ƒ Collection. ƒ Photographic studios. including commercial photography. 20 Natural Gas. ƒ Welfare institutions ƒ Business. ƒ Crude Petroleum & natural gas production (oil only). ƒ Sanitary and similar services. ƒ Education services. ƒ Social and related community services n. purification and distribution of water.\ 19 Crude Oil.ƒ Barber and beauty shops. ƒ Personal services.e. professional and labor associations. ƒ International and other extra territorial bodies. ƒ Religious organizations. dental and other health services.c. 18 Non Market Services. ƒ Medical. ƒ Public administration and defense. ƒ Dwellings. Crude petroleum and natural gas production (gas only) 28 . ƒ Veterinary services.

Implementation of the Oil Price Shocks in the Model The alternative scenarios have been implemented in the GEM-E3 model in the following way: (1) The lower accessibility of the oil reserves in the Middle East region provokes a shortage of supply. relative to the baseline. respectively.Annex 3. 29 . (3) The revenues from that production levy are recycled to firms. of 30% and 90% in Scenarios 1 and 2. a dummy levy on oil production was imposed. Such a fall in oil production translates into an increase. (2) In order to have the same oil price across all regions of the model.

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