TUESDAY, 03 Might 2011 ten:11WRITTEN BY GLEN ASHER
In the newest edition of the International Monetary Fund's Globe Economic Outlook publication, the IMF dedicates a chapter entitled "Oil Scarcity, Growth and International Imbalances" to an examination of the world's oil markets and the impact of expanding oil scarcity on the world's economic climate. In this document, the IMF seeks to answer the present status of oil scarcity, how oil scarcity will impact the global economic climate and how oil scarcity will impact economic policies around the globe.Now that the value of both Brent and West Texas Intermediate appear solidly positioned above $100 per barrel for the initial time due to the fact 2008, this is a timely study. Demand for oil has risen and, for some significant shoppers such as China, consumption levels have reached new records. Since oil is central to the world's economic climate, the impact of oil value volatility is crucial to economic growth and security. When oil costs have risen and fallen over the past f our decades, it is only now that the problem of looming oil scarcity is becoming increasingly discussed.The authors of the report think that the globe is, in reality, reaching a point of growing oil scarcity. Demand from emerging economies is acting in concert with decreasing levels of growth in provide resulting in growing tension in the world's oil markets. The IMF distinguishes in between an absolute drop in provide (decreasing absolute daily oil production level) and a drop in the level of oil provide growth. If oil provide growth were to drop by 1 percentage point, annual global economic growth would slow by an annual rate of 1-quarter of a point over the medium to lengthy term. On the other hand, a steady decline in absolute oil provide levels would have a much greater negative impact on the global economic climate even if there is an increase in substitution of other power sources in the place of oil. As well, the pace of the rise in oil scarcity will also impact the level of impact on the world's economic climate should really there be sudden downward trends in provide, the economic impact will be far greater than if provide constraints were gradual.Let's commence by searching at the concept of oil scarcity and the extent of the problem. To put the importance of oil to the worlds economic climate into perspective, oil is a crucial aspect in production and transportation and is the world's most widely traded commodity with globe exports averaging $1.8 trillion annually over the years 2007 to 2009, about ten percent of global exports. Oil costs normally adhere to the economic law of provide and demand. When demand rises, if the provide is steady, costs will normally rise which will ultimately outcome in both an increase in provide and a drop in demand. The value of oil normally reflects the chance price of bringing an extra barrel of oil to the market place. In common and over time, a high value normally implies that oil (or any other com modity) either is (or is anticipated to be) scarce whilst a low value normally implies abundance. Short term market fluctuations can occur that will lead to value spikes such as those observed in the 1970s OPEC embargo or the Gulf War in 1991 when the value spiked to just over $40 per barrel from just under $ten per barrel just 5 years earlier. Over the longer term, oil value adjustments normally appear to be reasonably smooth with a gentle rise prior to the rapid rise and fall in 2008 - 2009 which reflected matters in the world's economic climate rather than oil market macroeconomic components.The concept of oil scarcity is a contentious 1. A good number of authorities in the oil market now acknowledge that the globe might possibly well be entering a point of provide constraints. The decline in oil availability reflects the constraints placed by nature on the ability of the market to profitably explore for and generate reserves. When costs are low, the oil market normally r educes capital expenditures which areas downward pressures on provide. On the other hand, mounting oil costs have resulted in technological advancements that have impacted industry's ability 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 varieties. It is the widespread use of enhanced technology that is now depressing organic gas costs in North America exactly where both horizontal drilling and multi-state fracking have resulted in an oversupplied organic 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 forms the feedstock for quite a few of the items that we use in our daily lives. If substitutes for oil for these merchandise were found, oil provide constraints would have les s of an impact on costs due to the fact rising demand for the substitute would dampen oil value volatility.One of the basic components that impacts the world's economic climate is the reality that oil is the world's most important source of main power with over 33 percent of the world's total with coal accounting for 28 percent and organic gas accounting for 23 percent. In recent years, the globe has experienced elevated rates of growth in power consumption, especially from China who is now the world's number 1 overall power consumer. For the foreseeable future, growth in China's economic climate will be the main driver of increases in global power use. In common, the world's developed economies (OECD nations) expand with small increase in power usage, on the other hand, those non-OECD nations in lower earnings countries have a 1-to-1 relationship in between economic growth and power usage
Given the 1-to-1 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 almost 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 change in 1 variable to the percent change in a further variable. It is a tool for measuring the responsiveness of a function to adjustments in parameters in a unitless way..." The IMF found that an oil value increase of ten percent leads to only a .2 percent reduction in demand (low elasticity). Over a longer term of 20 years, that ten percent value increase reduces demand by only .7 percent, a pretty insignificant quantity. When searching at oil demand based on earnings, over the short-term, a 1 perce nt increase in earnings results 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 meaning that as incomes rise, over the short-term, people 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 amongst the developed nations of the OECD adjustments pretty small when the value of oil rises when compared to the demand of non-OECD nations. This is likely for the reason that in the course of the oil value shocks of the 1970s and 1980s, nations such as the United States and France switched from oil to other indicates of power generation such as coal and nuclear. The economies of the extra developed nations are somewhat extra immune from increases in the value of oil due to the fact their power generation does not call for the use of oil. The very same can't however be mentioned for those nations with less mature economies who nevertheless rely extra heavily on oil.What impact will growing oil scarcity have on the global economic climate? Robust and growing oil demand is expected from emerging market economies exactly where rapid earnings growth is becoming experienced. Since oil production appears to have reached a plateau over the past decade, provide and demand could well fall out of balance. As I noted above, even a drop in the average growth rate of oil production (not a drop in the absolute level of oil production) will have an impact on the globe economic climate. To put the following scenarios into perspective, oil production has grown at a historical rate of 1.8 percent annually.Now let's appear 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 value spike of 60 percent is predicted by the IMF mo dels. Over a 20 year period, a 200 percent increase in the value of oil is predicted. This will outcome in a enormous wealth transfer from consuming nations to exporting nations and will outcome in a much lower GDP for oil importers that is at least partially offset by a higher GDP for oil exporting nations. On the upside, elevated demand for goods from oil importers results in elevated exports of these goods by the wealthier oil exporting nations. Overall, the IMF feels that global economic growth is slowed by less than 1-quarter of a percent annually over the medium and lengthy term if oil production growth slows gradually. 2.) Oil production growth drops by a persistent three.8 percent annual growth rate: This scenario is extra closely related to scenario anticipated by the proponents of "peak oil". In this case, an immediate oil value spike of 200 percent is predicted by the IMF models. Over a 20 year period, an 800 percent increase in the value of oil is predicted. Valu e adjustments of this magnitude have never been experienced by the world's economic climate and the impact would make it pretty troublesome to carry out monetary policy. The economies of emerging Asia would be very impacted due to the fact their economic growth is at a 1-to-1 ratio with power usage. As well, the economies of those nations that have weak links to oil exporting nations, such as the United States, would be very impacted. It is likely that if oil output decreased substantially, oil exporting nations could well reserve an growing share of their production for domestic use, shrinking the quantity of oil obtainable for the world's oil markets. This could have the ultimate outcome of shrinking the world's provide of oil far quicker than would commonly be anticipated. A persistent decline in oil production growth of this size would outcome in bigger present account imbalances (exports minus imports) amongst nations with oil importing nations experiencing a 6 to 8 per centage point drop in GDP over the lengthy term.The state of oil scarcity can be mitigated by adjustments in government policy toward the development of sustainable sources of power, especially amongst nations that are net importers of oil. Modifications in policy will also be necessary for nations that use subsidies to maintain power costs reasonable for their citizens. As oil scarcity results in higher costs, the fiscal price of fuel subsidies could overwhelm the fiscal situation of these governments. Removing such subsidies has usually resulted in civil unrest, on the other hand, on the other hand, the reduction in subsidies would also enable market forces to operate their way via the method to reduce demand as costs rise. In place of subsidies, these governments will need to have to implement an enhanced social safety network to guarantee that their citizens do not face elevated poverty.Governments around the globe face a conundrum by ignoring the problem now, the world' s addiction to oil continues to rise unabated. By acting too soon to curtail oil consumption via the use of policy interventions, the world's economic climate could be thrown into a premature economic malaise. Since the scarcity of oil is a global trouble, it is essential that governments all through the globe act in a cooperative manner to guarantee that the ultimate outcome is 1 that is advantageous to all of us. The sooner that action is taken, the improved for everyone.
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