# **4.6 Sensitivity analysis**

We consider several changes in the main parameters of the model to evaluate the robustness of our conclusions.<sup>41</sup>

## **4.6.1 Energy price assumptions**

Crude oil and other substitutes such as coal and natural gas have seen increasingly higher price levels and volatility in recent years. Specifically, the average annual price of energy commodities (oil, natural gas, and coal) reached its highest level ever in real terms in 2022 (World Bank, 2023). The price of Brent crude oil averaged US$100/barrel (bbl) in 2022 and is expected to remain high according to IMF and World Bank forecasts used in the CPAT model (Table 3). This is already a substantial burden on South Asia in terms of rising import costs and the implications for inflation through the passthrough of imported food and fuel price changes. If just to improve energy security and reduce fiscal vulnerability as budgets grapple with oil price uncertainty, reducing the consumption of fossil fuels would provide a welcome benefit to South Asia.

To illustrate this point, we apply the CPAT model assuming the initial oil price in 2023 is at a lower bound (the level in Q2 2020) of US$35/barrel (‘”Low Price” Scenario’ section of Table 3). We then, apply the same annual changes for future years as those in the policy scenario above to produce a new hypothetical energy price path to 2030. Other fossil fuel prices follow the same path too (see last five rows of Table 3). We compare this path to the path assumed in the CEPR (actual forecast), with the 2022 initial year showing record-high prices (first five rows of Table 3). The gap between these two forecasted price paths represents the range of fossil fuel prices that could be reached over the next 10 years, and thus a confidence band for how sensitive the model is to assumptions about global fossil fuel prices.

**Table 3. Global fossil fuel price assumptions**

|**"Comprehensive Energy Price Reform" Scenario**||**2023**|**2024**|**2025**|**2026**|**2027**|**2028**|**2029**|**2030**|
|---|---|---|---|---|---|---|---|---|---|
|Crude Oil|$/bbl nom|87.0|78.5|76.3|74.6|73.2|72.1|72.1|72.1|
|Coal|$/ton nom|278.0|232.9|229.1|228.5|228.4|228.6|228.6|228.6|
|Natural Gas - LNG|$/MMBtu nom|26.7|23.6|21.7|19.9|19.7|19.5|19.5|19.5|
|Natural Gas - North America|$/MMBtu nom|4.8|5.0|5.1|5.1|5.2|5.2|5.2|5.2|
|Natural Gas - Europe|$/MMBtu nom|18.7|18.2|16.1|14.1|13.6|13.6|13.6|13.6|
|**"Low Price" Scenario**||**2023**|**2024**|**2025**|**2026**|**2027**|**2028**|**2029**|**2030**|
|Crude Oil|$/bbl nom|26.83|24.23|23.54|23.01|22.58|22.26|22.26|22.26|
|Coal|$/ton nom|43.27|36.25|35.66|35.56|35.55|35.57|35.57|35.57|
|Natural Gas - LNG|$/MMBtu nom|7.06|6.23|5.72|5.26|5.20|5.15|5.15|5.15|
|Natural Gas - North America|$/MMBtu nom|1.26|1.30|1.33|1.33|1.34|1.36|1.36|1.36|
|Natural Gas - Europe|$/MMBtu nom|1.21|1.18|1.04|0.92|0.88|0.88|0.88|0.88|

Source: Authors’ estimates using CPAT. Note: The forecasted price path in the CEPR is an average of World Bank Commodity Markets Outlook (October 2022): <u>www.worldbank.org/commodities; and IMF WEO (October 2022): https://www.imf.org/en/Research/commodity-prices</u> data.

> 41 In the sensitivity analysis, we only examine the five economies for which we conduct the distributional analysis (see Section 4.4 above).

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