Large oil and gas discoveries cause persistent core consumer price increases in open economies

Using a dataset of 1,309 large oil and gas discoveries across 79 economies from 1980 to 2019, focusing on those with at least a five-year production lag, the BIS research found that news of a large discovery leads to a persistent increase in core consumer prices over the following decade, with about half of the increase occurring before extraction begins. This effect is concentrated in non-tradable goods and services, while producer and tradable prices change little. Economic activity expands before production starts, the real exchange rate appreciates persistently, and the current account initially worsens before turning to surplus when new oil production begins. Inflation rises mainly under inflexible exchange rate regimes but is largely absent under flexible regimes, a difference explained by a three-sector New Keynesian model.