Falling oil and gas prices have wreaked havoc in currency and stock markets around the world. The declines are welcome news, however, for energy-dependent economies, particularly importers. Eastern Europe stands to benefit the most as a region in terms of increased competitiveness for its products.
In the past year, crude oil prices have fallen by as much as 70 percent, and gasoline prices in Europe have decreased some 40 percent. This trend increases the competitiveness of countries that depend on imported energy and whose industries consume lots of oil and gas. Eastern Europe fits this description best: The majority of East European countries rely on imports for over 90 percent of their energy needs.1 The exception is Poland, which employs domestically-produced coal for over half of its energy. In addition, Eastern Europe has energy-intensive industries developed or expanded during the communist era, when Russian supplies came cheap.2
How much can lower energy increase East European competitiveness? The 2011 input-output table for Bulgaria can help answer this question.3 The table records how much of the value added in one sector comes from inputs of another industry. For example, about 11 percent of the value added in the construction sector in Bulgaria comes from transport services and another 5 percent comes from the use of asphalt, a highly viscous form of petroleum, in building roads. Assuming the same quantities of transport services and asphalt will be used in 2016 as were used five years earlier, and that the full reduction in energy prices is transferred to the final price in construction, producer prices in construction should fall by about 8 percentage points. Other sectors with significant gains in competitiveness are transport (30 percentage points lower input prices), mining (15 percentage points), retail trade (12 percentage points), agriculture (9 percentage points), and metallurgy (8 percentage points).
These are just the direct effects. The actual boost to competitiveness is larger, as other input sectors also benefit from lower energy costs. If the exercise is repeated using the entire input-output table and accounting for second-order effects, producer prices in the Bulgarian construction sector can fall by as much as 13 percentage points, or 60 percent more than when considering only the first-order effect. For agriculture, the overall effect of increased competitiveness is nearly double, at 17 percentage points.
Firms in other countries also benefit from cheaper energy, but not as much—either because they are already more energy-efficient, for example in Western Europe; or because they enjoy low oil and gas prices to begin with, as is the case in Turkey.
Lower energy prices may be here to stay, or they might rebound from the current trough. East European industry should use this opportunity to invest in energy-efficient technology so it is not at a disadvantage next time prices go up—and so the recent increase in competitiveness can become a permanent economic gain.
3. The input-output table is available from the Organization for Economic Cooperation and Development.