Most countries have closed all their schools, while others have close...
2019-11-13 67 ENGLISH REPORTS
The Special Focus also provides empirical evidence for substitution between individual energy and metal commodities by examining the response of demand for a single commodity (e.g., copper) to the prices of its known substitutes (e.g., aluminum). Box: The impact of the September 14 strike on Saudi Arabia’s oil infrastructure The September 14 strike on Saudi Arabia’s oil facilities temporarily halved the country’s production capacity—about 6 percent of global supply. Brent futures gained nearly 15 percent on the first trading day following the attack, their largest one-day increase. However, by the end of September, prices had returned to pre-attack levels as Saudi Arabia swiftly restored production. The backdrop of slowing demand also helped contain prices. Long-term futures prices are also unchanged, suggesting either geopolitical risk plays less of a role in risk premium of oil prices, that oil supplies have become more diversified (reducing risks associated with disruptions), or that other fundamental factors such as weaker global growth are weighing on oil prices. Despite their limited impact, the attacks highlight the oil market’s dependence on critical infrastructure and transport bottlenecks that could be vulnerable to disruption.
Consumption of non-renewable resources surged over the past two decades, notably as a result of strong growth in emerging markets and developing economies (EMDEs). The surge was pronounced in metals, where consumption grew 150 percent during this period (Figure SF.1) This increase was driven by China, whose share of world metals consumption reached 50 percent in 2015, up from 10 percent two decades earlier. Similar increases took place in coal consumption, driven by China and India (World Bank 2018). As in earlier booms, high commodity prices induced investment and innovation on the supply side as well as efficiency gains, substitution, and reduced consumption on the demand side. As a result, commodity prices fell—non-energy prices in a smooth decline since 2011 and crude oil prices in a steep plunge in 2014. This created concerns about the challenges posed by low commodity prices for commodity exporting countries, and about suitable policies for addressing them (Baffes et al. 2015; Christensen 2016).
Meanwhile, discussions intensified regarding environmental concerns about the sustainability of production and consumption of certain commodities. Such concerns include the consequences of climate change, air and water pollution, and plastic waste. The relationship between commodity consumption, income growth, and commodity prices has typically been studied from a single commodity perspective. In an earlier Focus (October 2018 edition of the Commodity Markets Outlook), such a relationship was studied by applying the same modeling framework to several individual energy and metal commodities. This analysis expanded on existing literature by explicitly accounting for a “plateauing effect” on commodity consumption, i.e., a level of income at which per capita consumption no longer grows. In this Focus, we extend the analysis further by accounting for substitution among commodities through the inclusions of cross-price effects—an area of research that has not been explored widely for industrial commodities. Specifically, the Focus addresses the following questions: (1) How has substitution in commodity demand evolved? (2) What is the empirical evidence of substitution in commodity consumption?
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