Research
WORKING PAPERS:
This paper establishes supply and demand elasticities for a broad set of commodities based on a consistent dataset and identification methodology. We apply granular IV methods to a new cross-country panel dataset of commodity production and consumption from 1960-2021. The results indicate that commodity demand and supply are typically price inelastic. Demand and supply tend to be the most inelastic for minerals, whereas they are most elastic for agricultural commodities. The elasticities of energy commodities fall somewhere in between. Supply and demand become more elastic at longer time horizons for mineral and energy commodities, but not for most agricultural commodities.
Related IMF World Economic Outlook, Spring 2024 (Commodities Special Feature)
This paper studies the economic impact of fragmentation of commodity trade. We assemble a novel dataset of production and bilateral trade flows of the 48 most important energy, mineral and agricultural commodities. We develop a partial equilibrium framework to assess which commodity markets are most vulnerable in the event of trade disruptions and the economic risks that they pose. We find that commodity trade fragmentation – which has accelerated since Russia’s invasion of Ukraine – could cause large price changes and price volatility for many commodities. Mineral markets critical for the clean energy transition and selected agricultural commodity markets appear among the most vulnerable in the hypothetical segmentation of the world into two geopolitical blocs examined in the paper. Trade disruptions result in heterogeneous impacts on economic surplus across countries. However, due to offsetting effects across commodity producing and consuming countries, surplus losses appear modest at the global level. Submitted at the Journal of International Economics.
Related Chapter in IMF World Economic Outlook, October 2023
Atlantic Council Panel Discussion
Financial Times Editorial
Bloomberg Article South China Morning Post Article
We use structural scenario analysis to show that the climate policy mix—supply-side versus demand-side policies—can lead to different oil price paths with diverging distributional consequences in a net-zero emissions scenario. When emission reduction is driven by demand-side policies, prices would decline to around 25 USD per barrel in 2030, benefiting consuming countries. Vice versa, supply-side climate policies aimed at curbing oil production would push up prices to above 130 USD per barrel, benefiting those producing countries that take the political decision to keep on producing. Consequently, it is wrong to assume that oil prices will necessarily decline due to the clean energy transition. As policies are mostly formulated at the country level and hard to predict at the global level, the transition will raise uncertainty about the price outlook. R&R at the Journal of Applied Econometrics.
Related Commodities Special Feature in IMF World Economic Outlook, April 2022
The Economic Consequences of Large Extraction Declines: Lessons for the Green Transition (with Rudolfs Bems, Lukas Boehnert and Andrea Pescatori)
Limiting climate change requires a 80 percent reduction in fossil fuel extraction until 2050. What are the macroeconomic consequences for fossil fuel producing countries? We identify 35 episodes of persistent, exogenous declines in extraction based on a new data-set for 13 minerals (oil, gas, coal, metals) and 122 countries since 1950. We use local projections to estimate effects on real output as well as the external and the domestic sectors. Declines in extractive activity lead to persistent negative effects on real GDP and the trade balance. The real exchange rate depreciates but not enough to offset the decline in net exports. Effects on low-income countries are significantly larger than on high-income countries. Results suggest that legacy effects of bad institutions could prevent countries from benefiting from lower resource extraction.
Related chapter in the IMF World Economic Outlook, April 2023
Market Size and Supply Disruptions: Sharing the Pain of a Potential Russian Gas Shut-off to the European Union. (with Silvia Albrizio, John C. Bluedorn, Christoffer Koch and Andrea Pescatori) IMF-Working Paper, No. 2022/143.
We assess the supply-side effects on European Union (EU) economic activity if Russian gas imports were to suddenly cease. Unlike other studies, we account for the global scope of the liquefied natural gas (LNG) market. In the absence of frictions, an open-economy, multi-sector general equilibrium model suggests that the adverse economic impact on the EU shrinks five-fold if integration with the global LNG market is considered. While greater integration provides a buffer for the EU through trade, the flip side is that other LNG importers (such as Japan, South Korea, and Pakistan) see adverse effects from higher prices. Resubmitted at The Energy Journal.
Media Coverage: Financial Times, Financial Times 2, FT Editorial by Martin Wolf, Reuters, Bloomberg, The Guardian, Die Welt, Wall Street Journal
Natural Gas in Europe: The Potential Impact of Disruptions to Supply. (with Gabriel Di Bella, Mark Flanagan, Karim Forda, Svitlana Maslova, Alex Pienkowski, and Frederik Toscani) IMF-Working Paper, No. 2022/145.
This paper analyzes the implications of disruptions in Russian natural gas flows for Europe’s gas supply and economic output. We provide a new framework to analyze the issue taking into a account potential frictions within the pipeline infrastructure. Our findings suggest that in the short term, the most vulnerable countries in Central and Eastern Europe — Hungary, Slovak Republic and Czechia — face the risk of shortages of as much as 40 percent of gas consumption and of gross domestic product shrinking by up to 6 percent. The effects on Austria, Germany and Italy would also be significant, but would depend on the exact nature of remaining bottlenecks at the time of the shutoff and consequently the ability of the market to adjust. Many other countries are unlikely to face such constraints and the impact on GDP would be moderate—possibly under 1 percent. Resubmitted at Energy Economics.
Media Coverage by: Financial Times, Reuters, Bloomberg, The Guardian, Die Welt, Wall Street Journal, FT Editorial by Martin Wolf.
Non-Renewable Resources, Extraction Technology and Endogenous Growth (with Gregor Schwerhoff)
We document increasing extraction but constant real price trends for 65 non-renewable resources from 1700 to 2018. Why have resources not become scarcer as suggested by economic intuition? Resource stocks are not fixed but a function of geology and endogenous innovation in extraction technology. Rising resource demand incentivizes firms to innovate and allows extraction from lower grade deposits. Prices stay constant because resource quantities increase exponentially with lower grade deposits, which follows from a geological law. This offsets diminishing returns in innovation. As a result, the interaction between geology and innovation determines the long-run growth rate of aggregate output. There is no depletion effect. If innovation in extraction continues, a flat long-run supply curve of fossil fuels is a reasonable assumption. A rising carbon tax could discourage such innovation, limiting fossil fuel extraction and greenhouse gas emissions.
Dallas Fed Blog: "Solving a Puzzle: More Nonrenewable Resources without Higher Prices"
Dallas Fed Working Paper (Updated Version, 2019)
Paul Romer's blog "Conditional Optimism" about our paper
Dallas Fed Working Paper (2015)
Preprint of the Max Planck Institute for Research on Collective Goods (2012)
Dynamic Analysis of Collusive Action: The Case of the World Copper Market, 1882-2016 (with Gordon Rausser, UC Berkeley)
We advance a new framework for investigating the dynamic effects of collusion. In contrast to the standard reduced-form workhorse model, a structural vector auto-regressive model with sign restrictions allows us to endogenize cartel action and to distinguish unexpected market manipulations from other types of shocks. Utilizing a newly constructed monthly data set for the copper market from 1882 to 2016, we find that cartel action shocks have strong effects on price and output during collusive periods. More notably, these shocks have lessening, yet quite persistent impacts over the subsequent unwinding periods in which output damages dominate price damages.
PUBLICATIONS IN REFEREED JOURNALS:
Energy Transition Metals: Bottleneck for Net Zero Emissions? (with Lukas Boer and Andrea Pescatori), Journal of the European Economic Association, 22(1): 200-229.
The energy transition requires substantial amounts of metals, including copper, nickel, cobalt, and lithium. Are these metals a bottleneck? We identify metal-specific demand shocks, estimate supply elasticities, and study the price impact of the transition in a structural scenario analysis. Prices of these four metals would reach previous historical peaks but for an unprecedented, sustained period in a net-zero emissions scenario, potentially derailing the energy transition. Their production value would rise nearly four-fold to USD 11 trillion for the period 2021 to 2040. These four metals markets alone could become as important to the global economy as the oil market. Journal of the European Economic Association.
Replication Package (MATLAB Code and Data)
IMF Working Paper, DIW Working Paper, MPRA Working Paper
Financial Times coverage 1, Financial Times coverage 2, The Economist, Dan Yergin's editorial in the Wall Street Journal
Mining in Space Could Spur Sustainable Growth (with Maxwell Fleming, Ian Lange and Sayeh Shojaeinia), Proceedings of the National Academy of Sciences, 120(43):1-8.
Growth models with resources and environmental externalities typically assume that planet Earth is a closed economy. However, private firms like Blue Origin and SpaceX have reduced the cost of rocket launches by a factor of 20 over the last decade. What if these costs continue to decline, making mining from asteroids or the moon feasible? What would be the implications for economic growth and the environment? This paper provides stylized facts about cost trends, geology and the environmental impact of mining on Earth and potentially in space. We extend a neoclassical growth model to investigate the transition from mining on Earth to space. We find that such a transition could potentially allow for continued growth of metal use, while limiting environmental and social costs on Earth. Acknowledging the high uncertainty around the topic, our paper provides a starting point for research on how space mining could contribute to sustainable growth on Earth.
Sectoral Shocks and the Role of Market Integration: The Case of Natural Gas. (with Silvia Albrizio, John Bluedorn, Christoffer Koch and Andrea Pescatori), American Economic Review Papers and Proceedings, 113: 43-46.
We quantify how market integration affects the economic propagation of sectoral supply shocks at the example of a Russian gas shut-off to the European Union (EU). An open-economy, multi-sector general equilibrium model suggests that the adverse output impact on the EU shrinks four-fold if integration with the global liquified natural gas (LNG) market is considered. On the flip side other LNG importers also see adverse output effects. Due to non-linearities the combined total economic damage is less than half with integration compared to the counterfactual case without. Governments should foster further integration to make economies more resilient to supply shocks.
Non-Renewable Resource Extraction over the Long Term: Empirical Evidence from Global Copper Production (2022) Mineral Economics (special issue in honor of Friedrich-Wilhelm Wellmer), 35: 617-625.
Global mine production of copper has risen more than 80 times over the last 135 years. What were the main drivers? I examine this question based on copper market data from 1880 to 2020. I employ a structural time series model with sign restrictions to identify demand and supply shocks. I find that a deterministic trend drove most of the increase in the level of copper output. At the same time, unpredictable demand and supply shocks caused substantial fluctuations around the trend. A global commodity demand shock that is, for example, linked to a three percent unexpected expansion of the global economy due to rapid industrialization causes a ten percent rise in the real copper price, incentivizing a five percent increase in global copper production. The paper provides empirical evidence for the feedback control cycle of mineral supply.
Dry Bulk Shipping and the Evolution of Maritime Transport Costs, 1850-2020 (with David Jacks) (2021) Australian Economic History Review (special issue in honor of Jeffrey Williamson), 61(2): 204-227.
We provide evidence on the dynamic effects of fuel price shocks, shipping demand shocks, and shipping supply shocks on real dry bulk freight rates in the long run. We first analyze a new and large dataset on dry bulk freight rates for the period from 1850 to 2020, finding that they followed a downward but undulating path with a cumulative decline of 79%. Next, we turn to understanding the drivers of booms and busts in the dry bulk shipping industry, finding that shipping demand shocks strongly dominate all others as drivers of real dry bulk freight rates in the long run. Furthermore, while shipping demand shocks have increased in importance over time, shipping supply shocks in particular have become less relevant.
NBER Working Paper, Dallas Fed Working Paper
Dallas Fed Blog "A Tale of Boom and Bust: What Drives Dry Bulk Freight Rates?"
What Drives Commodity Price Booms and Busts? (with David Jacks) (2020) Energy Economics, 85:104035.
We provide evidence on the dynamic effects of commodity demand shocks, commodity supply shocks, and inventory demand shocks on real commodity prices. In particular, we analyze a new data set of price and production levels for 12 agricultural, metal, and soft commodities from 1870 to 2013. We identify differences in the type of shock driving prices of the various types of commodities and relate these differences to commodity types which reflect differences in long-run elasticities of supply and demand. Our results show that demand shocks strongly dominate supply shocks.
Dallas Fed Economic Letter "Demand Shocks Fuel Commodity Booms and Busts"
VoX EU Article "Drivers of Commodity Price Booms in the Long Run"
150 Years of Boom and Bust: What Drives Mineral Commodity Prices? (2018) Macroeconomic Dynamics, Vol. 22:3, pp. 702-717 .
This paper provides long-run evidence on the dynamic effects of supply and demand shocks on commodity prices. I assemble and analyze a new data set of price and production levels of copper, lead, tin, and zinc from 1840 to 2014. Using a novel approach to identification, I show that price fluctuations are primarily driven by demand rather than supply shocks. Demand shocks affect the price for up to fifteen years, whereas the effect of mineral supply shocks persists for up to five years. Price surges caused by rapid industrialization are a recurrent phenomenon throughout history. Mineral commodity prices return to their declining or stable trends in the long run.
Media Coverage: Bloomberg
Industrialization and the Demand for Mineral Commodities (2017) Journal of International Money and Finance, Vol. 76, pp. 16-27.
This paper uses a new data set that begins in 1840 to investigate how industrialization affects the derived demand for mineral commodities. I establish that there is substantial heterogeneity in the long-run effect of manufacturing output on demand across five commodities. A one percent increase in per capita manufacturing output leads to an approximately 1.5 percent increase in aluminum demand and a roughly 1 percent rise in copper demand. Estimated elasticities for lead, tin, and zinc are below unity. My results suggest that the experience of Japan and South Korea’s industrialization, for example, may be used to infer the impact of China’s industrialization on future demand for metals. The results imply substantial differences across commodities with regard to future demand. Adjustment to equilibrium takes 7–13 years, which helps explain the long duration of commodity price fluctuations.
BOOK REVIEWS:
The World for Sale: Money, Power, and the Traders Who Barter the Earth's Resources (by Javier Blas & Jack Farchy) The Energy Journal, Vol. 44, No. 6, 305-6 .