World Energy Outlook 2006

Increased flexibility in labour markets and more intense competition in
product markets have also helped to limit the second-round effects of higher
energy prices. Higher input costs and energy prices to consumers have
generally not led to a wage spiral. In some cases, price controls and subsidies
have limited or delayed the impact on final prices and inflation. In other
cases, high taxes on oil products have reduced the direct impact on the
consumer price index in percentage terms. Firms have found it harder than
in the past to pass through higher costs into the final prices of their goods
and services because of increasing global market competition.
There is also evidence that the monetary response to higher energy-import
costs has been more appropriate during the recent surge in prices than was
the case during past oil shocks (IMF, 2005). Central banks in many
countries, especially in the OECD, have been granted formal independence
from government in setting interest rates and controlling the money supply.
Most central banks now operate under inflation targets, rather than output
targets, and act more promptly than in the past in dampening inflationary
pressures. This has boosted their credibility and helped them establish a
climate of low inflationary expectations. Interest rates were raised in most
major economies in 2005 in response to the threat of rising inflation caused
by energy prices.
Although most oil-importing countries have so far coped well with higher
energy prices, some particularly energy-intensive sectors have suffered
disproportionately. Those most vulnerable to higher energy prices are
heavy manufacturing industry, including aluminium, petrochemicals and
iron and steel, and freight. Though booming demand has allowed
producers to pass through a considerable part of higher input costs to final
prices, limiting the impact on output, there are nonetheless signs that
petrochemical producers are struggling to maintain profit margins in the
face of competition from Middle East producers with access to cheaper
feedstock. Higher aviation costs have held back the growth of the tourist
industry in some countries.
Poor households generally have also endured a relatively large drop in their
real disposable incomes where commercial energy costs have been allowed to
rise in line with international prices. This is because energy represents a
larger share of their expenditure than it does for wealthier households. The
lowest-income households in the poorest oil-importing developing
countries are not always the most vulnerable to higher prices, because they
consume little commercial energy. But real incomes can be reduced
significantly as a result of slower economic growth, limiting the ability of
governments to fund welfare payments (UNDP/ESMAP, 2005a and
2005b). The World Bank estimates that the number of people in poverty in
Chapter 11 - The Impact of Higher Energy Prices 311
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© OECD/IEA, 2007