Category Archives: commodities

Addressing Commodity Price Volatility in Algeria & Morocco

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I recently visited Algeria and Morocco.  Like so many other developing countries, they are dealing with the sharp decline in global commodity prices that has taken place over the last few years.  In meetings in Algiers and Casablanca, I offered four concrete ideas for policies to help commodity-exporting countries deal with global price volatility.  The four proposals, very briefly, are: (1) hedging with options (as Mexico does), (2) commodity bonds, (3) countercyclical fiscal institutions (like Chile’s), and (4) central bank targeting of a currency-plus-commodity basket.

In Rabat, I further discussed countercyclical fiscal policy  and also at the OCP Policy Center did a video interview that included recent global economic developments.

It is easier to suggest ways to insure against a fall in the terms of trade when prices are high, as they were five years ago, than it is to give advice after the crash has already happened.  But I was pleased to learn that Morocco is on the list of countries — which includes also the UAE, India, Indonesia, among others – that have cut hugely wasteful consumer energy subsidies in recent years.   Algeria needs to do the same. It is running a budget deficit of 16% of GDP, most of which can be accounted for by subsidies to energy, food and water.  It is much easier politically to reform such subsidies at a time of falling world prices for energy and other commodities than in normal times.

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Currency and Commodity Markets in 2015

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This is the third and final installment of an interview on the outlook for the New Year.

Part 3. Forecasts for International Currency and Commodity Markets

Q – What is your forecast for the U.S. dollar? Do you think maintaining the strong dollar could ultimately help the U.S. economy, or hurt it?

A – The appreciation of the dollar against the euro and the yen in 2014 was precisely what we should have expected from the economic fundamentals: the strengthening of the US recovery at the same time that the euro and Japanese economies have been slumping and the end of US monetary easing at the same time that the ECB and the Bank of Japan have redoubled their efforts at monetary stimulus.

When trying to forecast exchange rates, one does well to recall the “random walk” principle.  One is doing well if one gets the direction of movement right slightly more than half the time.  Having said that, I would guess that the dollar is more likely to appreciate further in 2015 than to fall, for the same macroeconomic reasons as last year.

Would that be a good thing?  Moderate appreciation of the dollar against the euro and yen is the natural concomitant of the monetary and real economic fundamentals.  Europe and Japan need the stimulus of easy money and competitively priced-currencies.   If the US recovery were to falter in the future, the Fed could reverse its plans to raise interest rates and the dollar in that case would probably come back down.   But as of now, the US economy seems to be doing well.

Q -The oil price continues to fall to near $50 a barrel. How do you forecast the oil price for 2015 and beyond? How will it impact the world economy?

A – Among the reasons for the fall in the price of oil, of course, is the US shale energy boom (techniques associated with “fracking”).  Even though the new shale activity will moderate at these low prices, its ability to resume relatively quickly will work to prevent oil prices from rebounding.

The price decline goes beyond oil. Mineral and commodity prices have also fallen over the last year, at least in terms of dollars.  Disappointing levels of economic activity in much of the world are an obvious explanation.  But the business cycle doesn’t explain why commodity prices are down especially in the US, where economic activity strengthened in 2014.  The Economist commodity price index in 2014 was actually up in terms of euros; it was down only in terms of dollars, though that is what everybody focuses on.

The other factor is monetary policy: the end of quantitative easing in the US and renewed monetary stimulus elsewhere.  That is consistent with some commodity prices falling in dollars while simultaneously rising in terms of other currencies.   We could see more of this in the coming year.

I would say that oil prices and other commodity prices are more likely to continue falling in 2015 than to rise.  To the extent that oil prices are down because of the fracking boom or because some of the worst geopolitical fears have not materialized, this is good for the world economy (even though bad for oil producing countries).

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Why Are So Many Commodity Prices Down in the US… Yet Up in Europe?

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Oil prices plummeted 43% during the course of 2014 – good news for oil-importing countries, but bad news for Russia, Nigeria, Venezuela, and other oil exporters. Some attribute the price drop to the US shale-energy boom. Others cite OPEC’s failure to agree on supply restrictions.

But that is not the whole story. The price of iron ore is down, too. So are gold, silver, and platinum prices. And the same is true of sugar, cotton, and soybean prices. In fact, most dollar commodity prices have fallen since the beginning of the year. Though a host of sector-specific factors affect the price of each commodity, the fact that the downswing is so broadly shared – as is often the case with big price swings – suggests that macroeconomic factors are at work.

So, what macroeconomic factors could be driving down commodity prices? Perhaps it is deflation. But, though inflation is very low, and even negative in a few countries, something more must be going on, because commodity prices are falling relative to the overall price level. In other words, real commodity prices are falling.

The most common explanation is the global economic slowdown, which has diminished demand for energy, minerals, and agricultural products. Indeed, growth has slowed and GDP forecasts have been revised downward in most countries.

But the United States is a major exception. The American expansion seems increasingly well established, with estimated annual growth even exceeding 4 % over the last two quarters.  Private employment has risen by more than 200,000 for each of the last ten consecutive months. And yet it is particularly in the US that commodity prices have been falling. The Economist’s euro-denominated Commodity Price Index, for example, has actually risen by 4 per cent over the 12 months; it is only the Index in terms of dollars – which is what gets all the attention – that is down 6%.

That brings us to monetary policy, the importance of which as a determinant of commodity prices is often forgotten. Monetary tightening is widely anticipated in the US, with the Federal Reserve having ended Quantitative Easing in October and likely to raise short-term interest rates sometime in the coming year. Continue reading

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