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Review of IMF analysis, "Oil Scarcity, Growth, and Global Imbalances"

The International Monetary Fund recently released its latest World Economic Outlook (WEO), April 2011. Chapter 3 of this document is titled, "Oil Scarcity, Growth, and Global Imbalances" (36 pgs).

As far as this author is aware, the IMF has not done any previous work on peak oil, and the new Outlook seems to be the first acknowledgment by the IMF that the peaking of global oil production is a situation which could be both imminent and serious.

Mainstream media have paid little attention to the new WEO, and the coverage which has been provided has focused primarily on its optimistic aspects: “Gradual and moderate increases in oil scarcity – which seems the most likely scenario – would have a small impact….”

However, these reassurances are qualified throughout by many provisos. Indeed, the WEO observes that we may be in unprecedented territory with respect to oil supply: … global oil markets have entered a period of increased scarcity… a return to abundance is unlikely in the near term” (p. 89). The authors then qualify their earlier reassurances: "… the risks [oil scarcity] poses should not be underestimated, either. Much will ultimately depend on the extent and evolution of oil scarcity, which remain highly uncertain. There is a potential for abrupt shifts, which would have much larger effects…" (p. 90).

The WEO correctly observes that the current situation “must be considered in terms of underlying fundamentals” and then states, “These [supply] constraints became obvious when global crude oil production stagnated broadly during the global economic boom in the mid-2000s” (p. 97). What the authors should have emphasized was the fact that this stagnation of conventional crude production has persisted: despite the incentive of sustained high prices, conventional crude has been stuck at around 74 mbpd for over six years. They might also have mentioned that this unprecedented situation was highlighted by the IEA’s prediction last November that “Crude oil output… never regains its all-time peak… reached in 2006.”

The WEO barely touches on the matter of export decline, which is surely one of the more pressing aspects of oil scarcity: “Finally, the simulations do not consider the possibility that some oil exporters may reserve an increasing share… for domestic use…. If this were to happen, the amount of oil available to oil importers could shrink much faster than world oil output, with obvious negative consequences for growth in those regions” (p. 109).

This brief section seems greatly understated: the number of oil producing countries which are post-peak and in decline continues to grow, as does domestic consumption within exporting countries. Export decline therefore cannot be “a possibility” but rather an eventual certainty, as is the fact that we can’t all be importers.

The authors also warn of the potential for human emotions to exacerbate an already precarious position: “… perceptions of oil supply risks could still become more volatile…” (p. 32).

IMF analysts indicate a realistic understanding of just how delicate the emerging situation appears to be, and their final two pages (Box 3.3) explore several major vulnerabilities. The authors correctly point out, “Studies have noted how small increases in the probability of very unlikely but catastrophic events (such as oil shortages…) can have dramatic effects on human behavior” (p 121).

This section further warns, “Industries and firms that produce oil-intensive goods or use them as inputs are particularly vulnerable to oil price increases. Some of these industries and firms may no longer be profitable if oil prices stay high for long…. The adverse effects of large-scale bankruptcies in hard-hit industries can spread to the rest of the economy…” (p. 122).

In summary, Chapter 3 of the new World Economic Outlook contains some very significant observations. It is therefore worthy of much more attention than it has received so far.

This brief video reiterates the key points.

The PDF of the new WEO is available here.

What do you think? Leave a comment below.

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