Fossil Fuel Prices and the Economic and Budgetary Challenges of a Small Energy-Importing Economy: The Case of Portugal

Alfredo Pereira and Rui Pereira

No 115, Working Papers from Department of Economics, College of William and Mary

Abstract: This paper examines the economic and budgetary impacts of fuel prices using a dynamic general equilibrium model of the Portuguese economy which highlights the mechanisms of endogenous growth and includes a detailed modeling of the public sector. The fuel price scenarios are based on forecasts by the US Department of Energy (DOE-US) and the International Energy Agency (IEA-OECD) and represent a wide range of projections for absolute and relative fossil fuel prices. In terms of the long term economic impact, our results suggest a 1.9 percent drop in GDP in the DOE-US scenario and 1.6 percent in the IEA-OECD scenario. As to the budgetary impact, higher fuel prices lead to lower tax revenues, which, coupled with a reduction in public spending, translate into lower public deficits. Accordingly, increasing fuel prices create an important policy trade off in that they can contribute to reducing the public deficit while hindering economic growth. We find that fairly strong incentives for wind energy can reduce the economic impact of fuel prices by 14.2 percent in the DOE-US price scenario and 18.5 percent reduction in the IEA-OECD price scenario. Finally, our results highlight the importance of public sector spending decisions and the mechanisms of endogenous growth in understanding the impact of fossil fuel prices. Indeed, a scenario of higher fuel prices would, with exogenous public decisions and exogenous economic growth assumptions, result in substantially smaller economic effects and yield adverse budgetary effects.

Keywords: Fuel Prices; Economic Performance; Budgetary Consolidation; Dynamic General Equilibrium; Endogenous Growth; Portugal. (search for similar items in EconPapers)
JEL-codes: C68 D58 H50 H60 O52 Q43 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2012-10-19
New Economics Papers: this item is included in nep-ene
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://economics.wm.edu/wp/cwm_wp115rev1.pdf (application/pdf)

Related works:
Journal Article: Fossil fuel prices and the economic and budgetary challenges of a small energy-importing economy: the case of Portugal (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:cwm:wpaper:115

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