Oil and the World Economy: Some Possible Futures
IMF Working Papers, October 25, 2012
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- Oil and the World Economy: Some Possible Futures
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Bibliographic details
- Authors: Michael Kumhof, Dirk V Muir
- Published: October 25, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475586640.001
Summary
- The paper uses a six-region DSGE model of the world economy to assess the GDP and current account implications of permanent oil supply shocks hitting the world economy at an unspecified future date.
- For modest-sized shocks and conventional production technologies the effects are modest.
- For larger shocks, for elasticities of substitution that decline as oil usage is reduced to a minimum, and for production functions in which oil acts as a critical enabler of technologies, GDP growth could drop significantly.
- Oil prices could become so high that smooth adjustment, as assumed in the model, may become very difficult.
Model and analytical approach
- Model type: six-region DSGE model of the world economy.
- Shock type: permanent oil supply shocks at an unspecified future date.
- Production function considerations:
- Conventional production technologies yield modest effects for modest-sized shocks.
- Production functions where oil is a critical enabler of technologies can produce large negative impacts on GDP growth.
- Elasticities of substitution:
- Scenarios include elasticities that decline as oil usage is reduced to a minimum, which magnify adverse outcomes.
Key findings and implications
- Modest-sized supply shocks + conventional production technologies → modest effects on GDP and current accounts.
- Larger supply shocks, lower elasticities of substitution (as oil use approaches a minimum), and production functions with oil as a critical enabler → potential for significant drops in GDP growth.
- Very high oil prices could impede the smooth adjustment mechanisms assumed in the model.
Subjects and keywords (as presented)
- Subjects: Commodities, Demand elasticity, Economic theory, Oil, Oil prices, Oil production, Price elasticity, Prices, Production
- Keywords: Asia and Pacific, current account, demand and supply, Demand elasticity, elasticity of oil demand, Exhaustible resources, externalities, fossil fuels, Global, Hubbert’s Peak, Oil, oil depletion, oil price, Oil prices, Oil production, price elasticity, Price elasticity, production function, real interest rate, supply shock, WP
Content in this bundle
- _wp12256 — Baseline Scenario