Supply-side effects of strong energy price hikes in German industry and transportation

Abstract

The paper studies the short-term effects of energy price hikes on the supply of industrial goods and transport services including the repercussions on remuneration of input factors. While industry had suffered more strongly from the oil price shock of the late 1970s compared with the one of the early 1970s and the 2004-08 upsurge, evidence is reverse for transportation. Regarding the impact on the income distribution, both sectors share the pattern that in the recent episode rising energy costs were more than compensated by falling unit labor costs while in the 1970s cost structures had been strained by expansive wage policy in addition to the oil price shocks. Keywords: energy prices, supply of goods and services, income distribution.JEL classification: E23, E25, Q43. Non-echnical ummaryOil prices rose strongly in the period between 2004 and 2008. In this paper, we analyze how firms have reacted to this shock in the short run, as regards the supply of goods and services and/or output prices. The focus is on industry and transportation, as these sectors possess the highest shares in corporate energy consumption. In addition, the effects are compared with those of the two oil price shocks during the 1970s. (Since a partial-equilibrium analysis is adopted here, we do not need to distinguish whether oil price movements are driven by demand-side or supply-side factors.)In a first step, the short-run effect of an energy price hike on the supply of industrial goods and transport services is calculated on the basis of a theoretical model. In this setup, we assume that the output good is produced by three factors of production, namely capital, labor and energy. Firms react to energy price changes by adjusting the use of energy, labour input and, as a consequence, the volume of output. (In the short run, however, the capital stock is fixed and, for simplification, output prices are constant and money wages are settled.) The implications of the theoretical model are used to structure the empirical analysis. In particular, it is shown that the elasticity of substitution between capital and energy is central to the strength of the output response. Hence, the empirical analysis pays special attention to the estimation of this parameter.Contrary to the assumption imposed in theory, strong and lasting energy price surges cause firms to adjust output prices even in the short run. It is therefore more realistic to compute the output response on the basis of the increase in the effective energy price relative to the change in the output price. In order to obtain a comprehensive view of firms' reactions in such circumstances, the output price change is studied as well. In particular, it is decomposed into the contributions of the changes in the unit costs of factor inputs.The empirical analysis shows that industrial production was more severely affected by the oil price shock of the late 1970s than by those of the early 1970s and of the period between 2004 and 2008. By contrast, transport services were dampened more in th...

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