IMF Sees Oil Prices Staying High

Production constraints limiting increase in supply of oil

Growth in emerging markets, particularly China, boosting demand

Policies should aim at easing economies’ adjustment to increased oil scarcity

According to an analysis by the IMF, released as part of its World Economic Outlook (WEO), global oil markets are in a period of increased scarcity, as oil demand in emerging economies is rapidly catching up with demand in advanced economies and production constraints are beginning to bind in some major oil-exporting economies, where oil fields have reached maturity.

Improvements in oil supply have been slow, reflecting investment bottlenecks and other constraints, and the IMF expects net capacity will build only gradually.

The chapter on oil scarcity assesses the risk for the global economy in the medium term of the supply constraints. A persistent adverse oil supply shock would imply lower global output, higher revenues for oil exporters, a surge in global capital flows, and a widening of current account imbalances.

Oil still dominant

Oil remains the most important source of primary energy in the world, accounting for about 33 percent of the total. The two other fossil fuels, coal and natural gas, account for 28 and 23 percent. The analysis says that renewable sources of energy are in a rapid growth phase, but they still account for only a small fraction of primary energy supplies.

Despite the capacity constraints, the IMF research shows that it is premature to conclude that oil scarcity will inevitably be a strong constraint on global growth.

“Our simulation analysis shows that gradual and moderate increases in oil scarcity, consistent with supply projections by others, may only be a minor constraint on global growth in the medium to long term,” the IMF economists say. In particular, an unexpected sizable downshift in oil supply trend growth of 1 percentage point––from 1.8 percent to 0.8 percent––slows annual global growth by less than ¼ percent in the medium and long term.

However, such relatively mild effects on global growth should not be taken for granted since scarcity or its growth effects could be more significant, the WEO analysis shows.

Threats to oil supplies, including geopolitical risks, imply that oil scarcity could be more severe and may materialize in large and abrupt changes. The negative global...