While the installation and use of renewable energy is growing faster than ever before, one thing’s for sure, says Australia’s top-ranked young economist: oil isn’t going anywhere.
As the world’s population continues to grow at a rapid rate, our dependence on oil is expected to keep the fossil fuel industry afloat for a long time to come, said Dr Joaquin Vespignani from the Tasmanian School of Business & Economics.
And it’s his job to predict how this will impact domestic and global economies.
“We’re looking at how prices of high-value commodities such as oil affect factors like inflation, stock markets, and monetary policy in developing and non-developing economies, and how the impact is different in each country,” Dr Vespignani explains.
“There are also important interactions with other commodity prices, and this affects the wider global economy. That’s why understanding the impact of oil price fluctuations is so important for policy-makers around the world.”
In 2017, Dr Vespignani was named the top-ranked young economist in Australia by Research Papers in Economics (RePEc) for the second year running, and was placed among the top 10 in the world by year of graduation.
And for the past five years, he’s been using his expertise to navigate the volatile and high-stakes economics of the global oil market, to help policy-makers know how to respond when the next crisis hits.
The oil effect
Oil is one of the biggest contributors to what economists call ‘shocks’ – sudden and significant changes in the market that are impossible to predict.
“Commodity shocks can happen for many reasons, such as new policies, new technologies, unpredictable weather, or wars. And no one sees them coming,” said Dr Vespignani.
They can cause big, unanticipated changes to occur in prices, and I’m interested in how the economy responds to that.
The year 1973 is now remembered as the time of the great oil crisis, when members of the Organisation of Petroleum Exporting Countries (OPEC) declared an embargo, sending prices skyrocketing.
Inflation in the US spiked in response, and within two years, unemployment had doubled. The US economy slid into recession – soon followed by many other countries.
Similar crises were seen in 1979 and 1991, when the shock of increased oil prices sent economic policy-makers around the globe reeling.
Play to win
Or in another scenario, prices can take the market completely by surprise by plummeting instead of escalating.
In 2014, when experts were predicting oil prices to go up, they crashed, and economists have since tied this event to the first real slow-down of the rapid growth and expansion of China, Russia, India, and Brazil.
At the time, commodity producers had overestimated the market’s demand, and continued to increase their supply, leading to a severe decline in the price of oil and other commodities. And new technologies in oil extraction, such as fracking, pushed prices down even lower, says Vespignani, and it disrupted the markets even further.
That’s why Vespignani is so committed to investigating the after-effects of these shocks. And having published the two most downloaded articles of the past year in the journal Energy Economics, his insights on oil prices have become a commodity in their own right for decision-makers around the world.
“Policy has to respond,” said Dr Vespignani. “I study shocks because of that. We still don’t know which option is the best response.”