[Graeme]

This report is also posted on the front page but I'd like to post it here too.

IMF study: Peak oil could do serious damage to the global economy

So how bad would it be if peak oil was really upon us? That’s a question that two IMF economists try to tackle in a new working paper, “Oil and the World Economy: Some Possible Futures.” (pdf) The authors, Michael Kumhof and Dirk Muir, don’t make any definitive predictions about how the oil supply will evolve. Rather, they try to model a number of different scenarios in which oil does become more scarce and the world tries to adapt.

The paper itself offers an interesting look at how the world might cope with higher oil prices, so let’s take a look at the various scenarios:

1) Oil production grows very slowly or plateaus. This is the baseline scenario that Kumhof and Muir use. They assume that oil grows by about 1 percentage point less each year than its historical average. So, let’s say, oil grows at a steady 0.8 percent per year rather than the 1.8 percent annual average between 1981 and 2005. This isn’t a temporary oil disruption like the one we saw in 2008. It’s a persistent, long-term supply shock.

What would happen? Oil prices, the IMF model suggests, would gradually double in 10 years and quadruple over 20 years. Regions that import oil on net, such as Europe and the United States, would see a small hit to growth—about 0.2 to 0.4 percentage points each year. Countries that export, like Saudi Arabia, would get a lot wealthier.

2) Oil production grows at a slower rate, but the world adapts fairly easily. In this scenario, oil production declines, but countries start switching to electric cars or fueling their vehicles with natural gas. Vehicles and manufacturers become more efficient. In economist terms, the “elasticity” of demand quickly increases.

Under this scenario, the United States and Europe take just a small hit to growth, about 0.1 to 0.2 percentage points per year. Japan and Asia actually get a boost to their economy, since they can adapt to higher oil prices and export more stuff to oil-producing countries in the Middle East. All told, this is a fairly happy outcome.

3) Oil production grows at a slower rate, but the world can’t find substitutes.

washingtonpost

[dolanbaker]

Note the conclusion from the original article,
http://www.imf.org/external/pubs/ft/wp/2012/wp12256.pdf

V.
Conclusion
The scenarios developed in this paper highlight that the extent to which persistent oil
scarcity could constrain global economic growth and current account imbalances depends
critically on a small number of key factors. If, as in our baseline, the trend growth rate of
oil output declined only modestly, and if the economy was adequately represented by a
standard production function in capital, labor and oil, world output would eventually
suffer, but the effect might not be dramatic. If the substitutability between oil and other
factors of production was increasing in the oil price, the effect would be even smaller. But
if the reductions in oil output were more in line with the more pessimistic studies in the
scientific literature, the effects could be extremely large. The same could be true if, as
claimed by several authors in the scientific literature, standard production functions miss
important aspects of the economic role of oil under conditions of scarcity. We discussed
three possibilities. First, if the economy attempted to substitute away from oil, it might
encounter a lower limit of oil use dictated by entropy. Second, the contribution of oil to
output could be much larger than its cost share, because oil is an essential precondition
for the continued viability of many modern technologies. Third, the income elasticity of
oil demand could be equal to one third as in some empirical studies, rather than one as in
our model. And if two or more of these aggravating factors were to occur in combination,
the effects could range from dramatic to downright implausible.

That must be the nearest the IMF have come to contemplating the outside possibility of a "Mad Max" situation.