Oil Market Developments and the Global Economy

• Author: Selim Elekdag
• Pages: 1-3

Page 1

Over the past few years, extensive research has been conducted at the IMF on oil market developments and issues. Many of these studies have become Executive Board papers and documents for internal circulation. Although numerous working papers have complemented these documents, they focus mostly on particular countries. This article surveys IMF studies that examine a wide range of questions or investigate core issues regarding the oil market that are relevant for a broad range of members.

One of the most prominent features of the oil market is that both supply and demand are highly inelastic in the short run, with the resultPage 2 that even small shocks can trigger large price fluctuations.

On the supply side, Sommer (2005) starts off by presenting some basic stylized facts and then moves on to assess the longer-term oil market prospects. After highlighting that spare capacity is near historically low levels, he concludes that there are significant risks that the oil market will continue to be tight. In particular, Kochhar, Ouliaris, and Samiei (2005) focus on structural impediments that hinder investment in the oil sector, and a recent study by Mercer- Blackman (2006) finds evidence that real investment by international and national oil companies remains below the levels of the early 1990s-a key explanation of the current low production capacity levels.

Approaching longer-term oil market prospects from the demand side, Dargay, Gately, and Sommer (2007) investigate the relationship between vehicle ownership and income growth. Although interesting in their own right, this study's findings also suggest that vehicle ownership will increase rapidly in developing and emerging market countries, with China stealing the limelight with a projected twentyfold increase by 2030. This breakneck expansion of vehicle ownership implies rapid growth in oil demand.

But can we attribute all of the recent oil price volatility to fundamentals? Antoshin and Samiei (2006) pose an interesting question by asking if speculation has contributed to the recent rise in oil prices. They do not find compelling evidence that speculative activity has affected short- and long-run price fluctuations but argue instead that speculative positions seem to follow oil price movements.

With the tightness in the oil market expected to continue well into the future, the natural question to ask is to what extent higher oil prices affect the global economy. In an attempt to answer this question, both theoretical and empirical strategies have been employed, and these are reviewed in turn. On the theoretical front...