Impact of energy resources prices on the certain countries’ balance of payments structure and dynamics

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Impact of energy resources prices on the certain countries' balance of payments structure and dynamics

Rodionova T. A.

Manceva O. G.

Odessa I. I. Mechnikov National University

Annotation

The cost of energy resources is analyzed. The balances of payments of certain countries are examined. The impact of energy prices on the countries' balance of payments is analyzed. Patterns and significance of energy prices influence on balances of payments are determined. Conclusions are drawn regarding the degree of influence and significance of energy prices in certain countries.

Key words: energy resources, cost, balance of payments, dynamics, countries.

Резюме

Родіонова Т. А.

Манчева О. Г.

Одеський національний університет імені І. І. Мечникова

ВПЛИВ ВАРТОСТІ ЕНЕРГОРЕСУРСІВ НА СТРУКТУРУ ТА ДИНАМІКУ ПЛАТІЖНИХ БАЛАНСІВ ОКРЕМИХ КРАЇН

У статті проаналізовано вартість енергетичних ресурсів. Досліджено платіжні баланси окремих країн. Вивчено вплив цін енергоресурсів на платіжні баланси розглянутих країн. Визначено закономірності та значимість впливу зміни цін на енергоресурси на платіжні баланси. Сформульовано висновки щодо ступеня впливу і значимості цін на енергоресурси в економіках окремих країн.

Ключові слова: енергоресурси, вартість, платіжний баланс, динаміка, країни.

Резюме

Родионова Т. А.

Манчева Е. Г.

Одесский национальный университет имени И. И. Мечникова

ВЛИЯНИЕ СТОИМОСТИ ЭНЕРГОРЕСУРСОВ НА СТРУКТУРУ И ДИНАМИКУ ПЛАТЕЖНЫХ БАЛАНСОВ ОТДЕЛЬНЫХ СТРАН

В статье проанализирована стоимость энергетических ресурсов. Исследованы платежные балансы отдельных стран. Изучено влияние цен энергоресурсов на платежные балансы рассматриваемых стран. Определены закономерности и значимость влияния изменения цен на энергоресурсы на платежные балансы. Сформулированы выводы относительно степени влияния и значимости цен на энергоресурсы в экономиках отдельных стран.

Ключевые слова: энергоресурсы, стоимость, платежный баланс, динамика, страны.

Formulation of the problem

energy cost price

Nowadays, energy resources are very important components of economic relations and welfare of countries. Instabilities or certain changes in energy prices make significant impact on countries' economies. They may destabilize the whole economic system and indicate problems in other spheres. Because of that it is vital to understand how strong the influence of prices on the energy resources is in the countries connected with energy business. To make it clear, balance of payments and its dynamics should be considered and analyzed. It demonstrates the country's trade and general economic health.

Then the conclusions can be made about how much the energy resources' prices impact on economies and in which cases such influence is positive or negative. Further research may analyze and study how positive results of the impact can be obtained or negative effects can be avoided. It will have practical advice for countries considering increasing their economic stability.

Analysis of recent research and publications. Theoretical aspects of analyzing the energy resources' prices influence on economies were studied by many scientists. The list of them includes K. Rogoff, E. Dvir `Three Epochs of Oil', Ronald A. Ratti, Joaquin L. Vespignani `Oil prices and global factor macroeconomic variables', D. Janvan de Ven, R. Fouquet `Historical energy price shocks and their changing effects on the economy', G. Tverberg `Continuously Rising Energy Costs Will Cripple The Economy', R. Inglesi-Lotz `The impact of renewable energy consumption to economic growth: A panel data application', Ronald A. Ratti, Joaquin L. Vespignani `OPEC and non- OPEC oil production and the global economy' and others [1-6].

Unresolved problems of the research. There is a vast variety of research on how energy influences the economy. But this research will focus specifically on analysis of how energy prices impact the countries' balances of payments. Previous studies were not specialized on countries' balances of payments dynamics and their correlation to energy prices.

The goal of the research is to analyze and to study the impact of the energy market on the economy and the balances of payments dynamics of certain countries.

Presentation of the main material of the study.

The prices on natural gas, coal and oil are influenced by a number of other energy commodities and conditions of the market. So the prices on energy resources depend on a huge number of factors and it makes the energy market quite unstable and unpredictable sometimes. However, there are still certain correlations and patterns that should be taken into consideration while talking about energy market pricing.

The research of D. Janvan de Ven, R. Fouquet `Historical energy price shocks and their changing effects on the economy' considered the energy price abrupt changes and its influence on economic indicators such as import and GDP. It was stated that when the oil is getting more expensive, consumption of goods decreases. It effects negatively on GDP and so on the balance of payments of countries where the oil is imported [3]. And the following research will consider the opposite situation when the energy is being exported.

This research and events in the past show, that instabilities in oil market reflected on the whole world's economy. It means that most countries, especially those producing energy products suffered the most. It should have influenced on their balances of payments too. But nowadays, technology changes with a very high speed and every part of industry has been modernized. It seems that all potential problems can be preliminary monitored and fixed by machines and scientists. However, we still see that there is present a vast variety of risks which influence the world market and that the consequences are being hardly corrected.

There are present political, geopolitical, environmental, demand and supply, cost and other risks that may provide instabilities and raise different kind of problems. Because of that, countries and companies involved in energy business should carefully use risk management and be able to adapt to new external or even internal factors. This provides them new opportunities in further development of their business; otherwise, countries are going to have crisis.

The most important thing to be underlined is that oil prices have significant influence on the global natural gas market and its pricing. The evidence to the statement above is that a large number of longterm gas contracts historically have been indexed to the price of oil in Europe and Asia. Because of that, the oil prices instabilities affect gas prices of the global gas market noticeably.

The coal market is also known to be global. It is traded around the world, however to make it more efficient it was divided in two regional market. As it is generally known, these international markets are Atlantic and Pacific market. The reason to create the mentioned division was to get lower the prices through elevation of transportation efficiency. Owing to that, the transportation became much easier and cost-effective, as it is the main share of coal delivering price.

Another important feature of the coal market is that the coal prices have always been more stable and lower than prices on oil and gas. It is known to be one of the most affordable fuels. It is especially useful for developing countries as their neediness in energy is much higher despite the fact of considerable expenses [7].

The natural gas market also has its distinctive features. There are a lot of particular gas markets all around the Earth. There was seen a correlation in prices among them, however, it has eroded since 2009. The reason is to present different pricing systems. They demonstrate appropriate market circumstances and limited excess to arbitrage. There is an oil-indexed pricing system that is present on Asian market. It means that the prices are determined in response to the change of oil demand and supply by oil market spot prices.

Despite this, the USA prices are primarily based on the North American gas market. The prices on the latter market are determined in gas-on-gas based prices. It means that there is a competitive process between numerous natural gas suppliers. The same trend is seen on the UK market. The prices are also gas-on-gas based; however the difference in continental Europe is that it is more influenced by oil-indexed prices when arbitrage opportunities exist.

The main feature of oil market pricing is that oil is not used directly. This causes certain difficulties in determining its value. It also introduces specific institutional features of formation of the international market of this product. The value is determined by the price of its petroleum products. In turn, the very pricing does not entirely depend from the real supply and demand of the market. It depends in greater extent on the exchange mechanisms [8].

By analyzing energy market pricing history the further conclusion can be obtained. All fossil fuels prices fell worldwide in 2015 and 2016. Crude oil prices have experienced the largest percentages decline since 1986 - the Brent oil average price fell down to 47%, which reflected on the growth of imbalance between the world supply and demand. With the largest decrease of percentage in the North America, natural gas prices fell in all regions. Coal prices have also fallen worldwide during the four recent years but the decline was not that significant [9].

According to the graph below, different trends in energy sources prices are seen. The energy prices data was taken from the International Energy Agency and converted into USD per million BTU to make the comparison possible [10]. First of all, the illustration demonstrates certain instability in prices of the given three kinds of energy resources; however, the biggest one is seen in the price on oil. The price was relatively stable from 2012 to 2014 but in 2015 a sudden significant decline happened. The price fell down from around $27 to $16 per million btu. The decline continued and the lowest price of nearly $14 per million btu was pointed out in 2016. But then it started to rise and reached almost $18 per million btu in the beginning of 2018. All of these trends can be seen from Figure 1.

To analyze the influence which energy market has on countries it was decided to take into consideration balances of payments dynamics of countries, which economies are largely dependent on energy business and in which energy products compose the biggest share of export. Thus, the connection and correlation of this sector with the economy would be much more obvious than while analyzing other economies. The balance of payments gives an idea of the country's participation in the world economy, the scale, the structure and nature of its foreign economic relations. What's more, it reflects structural imbalances in the economy that determine the different export opportunities and the needs for importing goods, capital and services.

Considering that energy producing countries' exports are mainly composed from energy products, it certainly influences on the countries' balance of payments state. The prices for energy products influence exports on a very large scale, in turn. The export volume affects the countries' income and further possible national consumption and the import accordingly. The export prices also influence the competitive position of the country on the world scale. It means that those countries in energy business are highly dependent on the prices of the product they produce. And these facts are reflected on the balance of payments.

Taking into consideration stated above, further countries were chosen for their balances of payments analysis. These are Saudi Arabia, Russia and Qatar.

The balance of payments data was taken from International monetary fund [11]. The total balances of payments of these countries were analyzed. The oil prices data was taken from the International Energy Agency [10].

It can be seen from Figure 1, that coal prices are mainly stable along the whole analyzed period. The gas prices did not have such significant changes as oil prices along this period too. So it would be rational to consider the oil prices changes and to seek correlation of chosen countries' balances of payments with them.

Figure 1. Power Generation Fuel Costs, USD per Million Btu

Source: [10]

Figure 2. Balances of Payments to Oil Prices Correlation

Source: [10; 11]

Using the graphic analysis method, the balances of payments' dynamics show approximately common trends in balances of payments of energy producing countries to the oil prices dynamics, as it can be seen on Figure 2. Oil products constitute nearly 70% of Saudi Arabian exports [12]. It means that oil price changes influence hardly the country's economy. It can be seen from Figure 2 that trend of Saudi Arabian balance of payments is almost totally the same as the oil price's changes. But the balance of payments' reduction was even worse than oil price decrease. So the decrease of the exported energy resource prices certainly affected the Saudi Arabia's balance of payments and, moreover, on a larger scale than the oil price decreased. This situation can be explained by the fact that the prices decreased and the exports did not just stay the same, but even diminished because of the membership of Saudi Arabia in OPEC and its agreement with some other oil producing countries to decrease their oil production.

Turning to the Russian balance of payments dynamics, such trends were obtained. Oil products make up nearly 50% of Russian exports [12]. This country's balance of payments trend does not match that much with the oil price changes as the previously researched country's balance of payments did. The trends are nearly common during 2012-2013 and 2015-2017. But during 2014-2015 and 2017-2018 they differ. It is know that there were sanctions implemented on Russia by European Union. Because of this both exports and imports have diminished. And despite that oil prices and exports decreased, even more significant reduction happened to Russian imports abruptly. That is the reason of the correlation absence during the period of 2014-2015. And in spite of the oil prices increase during 2017-2018, Russian balance of payments remained the same.

Now, looking at Qatar, further features can be determined. Oil products make up more than 85% of Qatar exports [12]. This country's balance of payments dynamics is more stable than the Saudi Arabia's. However, the correlation still strongly persists. Its balance of payments was negative in 2016 but the Saudi Arabia's one was much far below zero from second part of 2014 and until second part of 2016.

Table 1 Balances of Payments to Oil Prices Correlation Indexes

Figure 3. Investment Position to Oil Prices Correlation

To ensure that the correlation between chosen countries' balances of payments and oil prices exists, another kind of the statistical analysis can be used. By using correlation method the following results were obtained. Results from the Table 1 show, that there is very high correlation between Saudi Arabian and Qatar's balances of payments and oil prices.

It is approximately 0.92 and 0.95 respectively. And that means that the correlation has direct dependency and strong because the coefficients are very close to 1. However, Russian balance of payments does not have that strong correlation with oil prices, as its correlation index is only 0.4. So it is closer to 0 and it means that the correlation is also positive but much lower.

Table 2 Investment Position to Oil Prices Correlation Indexes

Conclusions

Energy prices are influenced by a variety of factors. And the pricing of energy products is very important for energy producing countries. It reflects on their economies and, that have been proved by the above research, on their balances of payments. The balance of payments, in turn, represents the rate of country's participation in the world economy, the structure and nature of its foreign economic relations. The researched energy producing countries, which are Saudi Arabia, Russia and Qatar, have oil as a significant part of their export. The analysis of these countries' balances of payments to oil prices correlation proved that the correlation persists indeed. All these countries' balances of payments revealed the same trends as the oil prices changes. Moreover, the investment position changes trend during 2012 to 2018 correlated to the oil prices changes too.

Further researches may analyze and study positive and negative results of the energy resources' prices impact and how benefits can be obtained or negative effects can be avoided. It will have practical advice for countries concerning their economic stability. In other case, further research may consider ways of monitoring, predicting and preventing of potential instabilities, risks and other specific problems that may occur or become the result of the instabilities.

References

1. Eyal Dvir, Kenneth S. Rogoff. Three Epochs of Oil. The National Bureau of Eco-nomic Research, 2009. URL: http://www.nber.org/papers/w14927.pdf.

2. Ronald A. Ratti, Joaquin L. Vespignani. Oil prices and global factor macroeco-nomic variables. Energy Economics. 2016. Vol. 59. P. 198-212.

3. D. Janvan de Ven, R. Fouquet. Historical energy price shocks and their changing effects on the economy. Energy Economics. 2017. Vol. 62. P. 204-216.

4. G. Tverberg. Continuously Rising Energy Costs Will Cripple The Economy. Our Finite World. 2018. URL: https://oilprice.com/ Energy/Energy-General/Continuously-Rising-Energy-Costs-Will-Cripple-The-Economy.html.

5. R. Inglesi-Lotz. The impact of renewable energy consumption to economic growth: A panel data application. Energy Economics. 2016. Vol. 53. P. 58-63.

6. Ronald A. Ratti, Joaquin L. Vespignani. OPEC and non-OPEC oil production and the global economy. Energy Economics. 2015. Vol. 50. P. 364-378.

7. The World Coal Association. Coal Market & Pricing. URL: https://www.worldcoal.org/coal/coal-market-pricing.

8. Morgunov E.V. Analiz neftianogo rynka i rekomendatsii po sovershenstvovaniyu rossiyskoi modeli birjevoi torgovli neftiu [Analysis of the oil market and recommendations for improving the Russian model of exchange trade in oil]. University Bulletin. 2010. Vol. 8. No. 2. P. 196-201.

9. The World of Changes. The World Energy Market Development until 2035. URL: http://mirperemen.net/2016/08/razvitie- mirovogo-energeticheskogo-rynka-do-2035-goda/.

10. International Monetary Fund Data. Access to Macroeconomic & Financial Data. BOP. URL: http://data.imf.org/regular. aspx?key=61545851.

11. The Observatory of Economic Complexity. Countries. URL: https://atlas.media.mit.edu/en/profile/country/.

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