TUESDAY, 03 May perhaps 2011 10:11WRITTEN BY GLEN ASHER
In the most recent edition of the International Monetary Fund's World Economic Outlook publication, the IMF dedicates a chapter entitled "Oil Scarcity, Growth and Global Imbalances" to an examination of the world's oil markets and the impact of growing oil scarcity on the world's economy. In this document, the IMF seeks to answer the existing status of oil scarcity, how oil scarcity will impact the global economy and how oil scarcity will impact economic policies around the world.Now that the price of both Brent and West Texas Intermediate appear solidly positioned above $100 per barrel for the initial time since 2008, this is a timely study. Demand for oil has risen and, for some main customers such as China, consumption levels have reached new records. Considering that oil is central to the world's economy, the impact of oil price volatility is important to economic growth and security. Whilst oil costs have risen and fallen over the past 4 decades, it is only now that t he issue of looming oil scarcity is becoming increasingly discussed.The authors of the report believe that the world is, in reality, reaching a point of escalating oil scarcity. Demand from emerging economies is acting in concert with decreasing levels of growth in supply resulting in escalating tension in the world's oil markets. The IMF distinguishes between an absolute drop in supply (decreasing absolute day-to-day oil production level) and a drop in the level of oil supply growth. If oil supply growth had been to drop by one percentage point, annual global economic growth would slow by an annual rate of one-quarter of a point over the medium to lengthy term. On the other hand, a steady decline in absolute oil supply levels would have a significantly greater negative impact on the global economy even if there is an increase in substitution of other power sources in the place of oil. As nicely, the pace of the rise in oil scarcity will also impact the level of impact on th e world's economy ought to there be sudden downward trends in supply, the economic impact will be far greater than if supply constraints had been gradual.Let's start by searching at the concept of oil scarcity and the extent of the issue. To put the significance of oil to the worlds economy into perspective, oil is a important aspect in production and transportation and is the world's most widely traded commodity with world exports averaging $1.8 trillion annually over the years 2007 to 2009, about 10 percent of global exports. Oil costs generally follow the economic law of supply and demand. When demand rises, if the supply is steady, costs will generally rise which will ultimately result in both an increase in supply and a drop in demand. The price of oil generally reflects the chance expense of bringing an additional barrel of oil to the market place. In general and over time, a high price generally implies that oil (or any other commodity) either is (or is anticipated to be) scarce whilst a low price generally implies abundance. Short term market fluctuations can occur that will lead to price spikes such as those seen in the 1970s OPEC embargo or the Gulf War in 1991 when the price spiked to just over $40 per barrel from just under $10 per barrel just five years earlier. More than the longer term, oil price modifications generally seem to be reasonably smooth with a gentle rise prior to the rapid rise and fall in 2008 - 2009 which reflected concerns in the world's economy rather than oil market macroeconomic variables.The concept of oil scarcity is a contentious one. Most authorities in the oil market now acknowledge that the world may nicely be entering a point of supply constraints. The decline in oil availability reflects the constraints placed by nature on the capability of the market to profitably explore for and produce reserves. When costs are low, the oil market generally reduces capital expenditures which areas downward pressures o n supply. On the other hand, mounting oil costs have resulted in technological advancements that have impacted industry's capability to bring certain reserves to market, for example, the advent of both deep water drilling and multi-stage hydraulic have allowed the market to invest in higher threat/lower productivity play types. It is the widespread use of enhanced technology that is now depressing natural gas costs in North America exactly where both horizontal drilling and multi-state fracking have resulted in an oversupplied natural gas market.The scarcity of oil is also related to the properties of the commodity. Oil has distinctive physical properties that make substitution troublesome, especially in the chemical market exactly where it types the feedstock for a large number of of the items that we use in our day-to-day lives. If substitutes for oil for these products had been located, oil supply constraints would have less of an impact on costs since rising demand for t he substitute would dampen oil price volatility.One of the basic variables that impacts the world's economy is the reality that oil is the world's most fundamental source of main power with over 33 percent of the world's total with coal accounting for 28 percent and natural gas accounting for 23 percent. In recent years, the world has skilled improved rates of growth in power consumption, especially from China who is now the world's number one overall power consumer. For the foreseeable future, growth in China's economy will be the main driver of increases in global power use. In general, the world's developed economies (OECD nations) expand with small increase in power usage, then again, those non-OECD nations in lower income nations have a one-to-one relationship between economic growth and power usage
Given the one-to-one relationship noted above, the IMF forecasts that China's power consumption is predicted to double by 2017 and triple by 2035 in comparison to its 2008 level. In 2000, China consumed 6 percent of the world's overall oil consumption, this rose to practically 11 percent in 2010 with coal accounting for 71 percent of total power consumption and oil for 19 percent.The IMF study also examined the elasticity of oil. Elasticity is defined as "...the ratio of the percent adjust in one variable to the percent adjust in one other variable. It is a tool for measuring the responsiveness of a function to modifications in parameters in a unitless way..." The IMF located that an oil price increase of 10 percent leads to only a .two percent reduction in demand (low elasticity). More than a longer term of 20 years, that 10 percent price increase reduces demand by only .7 percent, a especially insignificant amount. When searching at oil demand based on income, over the b rief-term, a 1 percent increase in income outcomes in a .68 percent increase in oil demand this drops to .29 percent over the longer term. This is far lower than the increase in demand for total power consumption which means that as incomes rise, over the brief-term, folks increase their demand for oil but over the longer term, whilst their demand for all power sources increases, they substitute other fuels for oil. It is intriguing to note that the demand for oil among the developed nations of the OECD modifications especially small when the price of oil rises when compared to the demand of non-OECD nations. This is likely given that in the course of the oil price shocks of the 1970s and 1980s, nations such as the United States and France switched from oil to other means of power generation such as coal and nuclear. The economies of the way more developed nations are somewhat way more immune from increases in the price of oil since their power generation does not demand the use of oil. The identical can't however be said for those nations with less mature economies who nevertheless rely way more heavily on oil.What impact will escalating oil scarcity have on the global economy? Robust and escalating oil demand is expected from emerging market economies exactly where rapid income growth is getting skilled. Considering that oil production appears to have reached a plateau over the past decade, supply and demand could nicely fall out of balance. As I noted above, even a drop in the typical growth rate of oil production (not a drop in the absolute level of oil production) will have an impact on the world economy. To put the following scenarios into perspective, oil production has grown at a historical rate of 1.8 percent annually.Now let's look at two of the IMF oil scarcity scenarios:1.) Oil production growth drops by a persistent 1 percent annual growth rate: In this case, an immediate oil price spike of 60 percent is predicted by the IMF models . More than a 20 year period, a 200 percent increase in the price of oil is predicted. This will result in a huge wealth transfer from consuming nations to exporting nations and will result in a significantly lower GDP for oil importers that is at least partially offset by a higher GDP for oil exporting nations. On the upside, improved demand for goods from oil importers outcomes in improved exports of these goods by the wealthier oil exporting nations. Overall, the IMF feels that global economic growth is slowed by less than one-quarter of a percent annually over the medium and lengthy term if oil production growth slows gradually. two.) Oil production growth drops by a persistent three.8 percent annual growth rate: This scenario is way more closely related to scenario anticipated by the proponents of "peak oil". In this case, an immediate oil price spike of 200 percent is predicted by the IMF models. More than a 20 year period, an 800 percent increase in the price of oil i s predicted. Price modifications of this magnitude have never been skilled by the world's economy and the impact would make it especially troublesome to carry out monetary policy. The economies of emerging Asia would be highly impacted since their economic growth is at a one-to-one ratio with power usage. As nicely, the economies of those nations that have weak links to oil exporting nations, such as the United States, would be highly impacted. It is likely that if oil output decreased substantially, oil exporting nations may nicely reserve an escalating share of their production for domestic use, shrinking the amount of oil available for the world's oil markets. This could have the ultimate result of shrinking the world's supply of oil far quicker than would typically be anticipated. A persistent decline in oil production growth of this size would result in larger existing account imbalances (exports minus imports) among nations with oil importing nations experiencing a 6 t o 8 percentage point drop in GDP over the lengthy term.The state of oil scarcity can be mitigated by modifications in government policy toward the development of sustainable sources of power, especially among nations that are net importers of oil. Alterations in policy will also be necessary for nations that use subsidies to maintain power expenses reasonable for their citizens. As oil scarcity outcomes in higher costs, the fiscal expense of fuel subsidies could overwhelm the fiscal circumstance of these governments. Removing such subsidies has frequently resulted in civil unrest, then again, on the other hand, the reduction in subsidies would also enable market forces to perform their way by means of the system to cut down demand as costs rise. In place of subsidies, these governments will have to have to implement an enhanced social safety network to make sure that their citizens do not face improved poverty.Governments around the world face a conundrum by ignoring the iss ue now, the world's addiction to oil continues to rise unabated. By acting too soon to curtail oil consumption by means of the use of policy interventions, the world's economy could be thrown into a premature economic malaise. Considering that the scarcity of oil is a global dilemma, it is crucial that governments all through the world act in a cooperative manner to make sure that the ultimate outcome is one that is advantageous to all of us. The sooner that action is taken, the much better for every person.
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