OIL SUPPLY AND PRICES : GLOBAL IMBALANCES

The persistent increase in oil prices over the past decade suggests that global oil markets have entered a period of increased scarcity. Given the expected rapid growth in oil demand in emerging market economies and a downshift in the trend growth of oil supply, a return to abundance is unlikely in the near term. This chapter suggests that gradual and moderate increases in oil scarcity may not present a major constraint on global growth in the medium to long term, although the wealth transfer from oil importers to exporters would increase capital flows and widen current account imbalances. Adverse effects could be much larger, depending on the extent and evolution of oil scarcity and the ability of the world economy to cope with increased scarcity. Sudden surges in oil prices could trigger large global output losses, redistribution, and sectoral shifts. There are two broad areas for policy action. First, given the potential for unexpected increases in the scarcity of oil and other resources, policymakers should review whether the current policy frameworks facilitate adjustment to unexpected changes in oil scarcity. Second, consideration should be given to policies aimed at lowering the risk of oil scarcity.

After a two years of Covid – 19 pandemic, natural resources are again in the headlines. The spot price of a barrel of crude oil crossed the US$ 77.29 to 100.08 threshold from January 2022. The prices of many other commodities have risen to meet or surpass their pre-crisis peaks, and commodity futures markets point to further price increases in the next year or two. Commodity price strength mirrors buoyancy on the demand side. Consumption levels of many natural resources, including crude oil, have already risen above pre-crisis peaks, largely reflecting robust demand in emerging and developing economies.

At current high levels, commodity price developments and prospects can have important global economic repercussions. The possibility that rising energy prices will spill over into core inflation is just one example. But how unusual is the current situation? There are important linkages between global economic conditions and commodity prices, and large fluctuations in commodity prices over the global cycle are nothing new. Cyclical factors and special factors seem to explain much recent commodity price behaviour. Nevertheless, persistent commodity price increases in recent years point to a break with the experience of the 1980s and 1990s as well as with the experience of earlier commodity price booms. Concern about resource scarcity is more widespread now than a decade or two ago.

On the one hand, oil market prospects are central to the global economic outlook—the oil price assumption is one of the key assumptions underlying the forecasts in the World Economic Outlook (WEO). On the other hand, there is considerable uncertainty about how strong the tension will be between rapid growth in oil demand in emerging market economies and the downshift in oil supply trends. The baseline oil market which is based on current oil market pricing, assumes that the tension will be resolved with oil prices around current high levels.

Against this backdrop, this chapter analyzes the risks presented by several oil scarcity scenarios for the global outlook and the transition to a more robust and balanced global expansion. As indicated by the emphasis on scarcity, the focus is on the medium to long term, not on short-term risks.

A discussion of oil scarcity faces the challenge of any forward looking analysis. Experience to date does not allow for strong predictions about the likely evolution of some of the factors that will determine the eventual extent and impact of oil scarcity. For example, technological developments will be crucial. These will affect the cost of extracting oil from reservoirs or deposits so far deemed uneconomical and will define the scope for efficiency and substitution. In the face of such uncertainty, which increases with the time horizon, the key objective is to illustrate the potential global economic impact of various oil scarcity scenarios. At the same time, it marks the beginning of renewed efforts

to give greater consideration to the role of oil and other natural resources in the IMF’s modelling of the global economy, both as the source of shocks and in the transmission of other shocks.

• The increases in the trend component of oil prices suggest that the global oil market has entered a period of increased scarcity. The analysis of demand and supply prospects for crude oil suggests that the increased scarcity arises from continued tension between rapid growth in oil demand in emerging market economies and the downshift in oil supply trend growth. If the tension intensifies, whether from stronger demand, traditional supply disruptions, or setbacks to capacity growth, market clearing could force price spikes.

As for the effects on the global economy, the simulation analysis suggests that the impact of increased oil scarcity on global growth could be relatively minor if it involves primarily a gradual downshift in oil supply growth rather than an absolute decline. In particular, a sizeable downshift in oil supply trend growth of 1 percentage point appears to slow annual global growth by less than 1⁄4 percent in the medium and longer term. On the other hand, a persistent decline in oil supply levels could have sizeable negative effects on output even if there is greater substitutability between oil and other primary energy sources. At the same time, in the medium term, the oil-induced wealth transfer from oil importers to exporters can increase capital flows reduce the real interest rate and widen current account imbalances.

The oil scarcity will not inevitably be a strong constraint on the global economy. However, the risks it poses should not be underestimated either. Much will ultimately depend on the extent and evolution of oil scarcity, which remain uncertain. There is a potential for abrupt shifts, which would have much larger effects than more gradual shifts. We must concludes that policymakers should strengthen measures to reduce the risks from oil scarcity as a precautionary step and to facilitate adjustment if such shifts are larger than expected or materialize in an abrupt manner. Policies need to be complemented with efforts to strengthen social safety nets, because higher oil prices could lead to shifts in income distribution and to increased poverty.