The New Oil Paradigm: Can the Developing World Live with $100 Plus Oil?
The research examines the impact of $100 plus oil prices on the economic growth rates of the largest emerging market economies. The paper’s estimates were based upon a starting price (base price) for oil of $75 per barrel. Some of the highlights of the paper’s findings include:
Over the next decade, more than 90 percent of the demand expansion in energy is expected to come from the emerging market economies.
A rise in oil prices from $75 to $100 a barrel (annual average) would cost the global economy approximately 1.3% in net growth during the first year.
Emerging Asia is clearly the region that is the most vulnerable to higher oil prices. Strong economic growth has increased the regions’ appetite for energy enormously in recent years, more than offsetting recent gains in efficiency and oil currently consumes 3% of the region’s GDP.
In the not too distant future, China remains relatively resilient to higher oil prices. Even oil averaging $120 is only expected to shave growth by 1.7%. Its oil dependency, however, is set to grow very rapidly over the next decade as production remains stagnate and consumption continues growing rapidly.
Among the big emerging market economies, India has become the most vulnerable in recent years. Oil at $100 and $120 per barrel is expected to reduce economic growth by a maximum of 1.5% and 2.7%, respectively. For a nation critically trying to raise its growth rate north of 8%, these are not inconsequential energy drains.
At $100 per barrel, Russia would see a net GDP transfer of up to 4.6 percent.
The paper stated that once global GDP growth rebounded to its long-term trend (4-5%), energy-demand growth will also strengthen again to levels seen late last decade. Energy demand growth is projected to recover and grow 2.3% annually over the next decade (2010 – 2020), nearly a percentage point faster than from 2006 to 2010. The paper warns that if this comes to bear, the tight demand-supply balance seen at the end of 2007 that led to $100 plus prices could easily return for a protracted period.
The paper also found that while the rich OECD economies had significantly increased their energy efficiency since the 1980s, they were even more vulnerable to elevated oil prices compared to the second half of last decade (because of debt levels). Oil prices averaging $100 per barrel was expected to cost the OECD economies economic growth of 0.5 percent (1 percent growth at $120 per barrel), a significant amount for a region struggling to grow 2 percent a year.