What is going on? The International Monetary Fund -- a body that states its mission is to "foster global growth and economic stability" has produced a major report which concludes the world has entered an era of oil scarcity, and openly discusses a peak oil scenario in which global GDP doesn't grow, but declines steeply !
- global markets have entered a period of increased scarcity
- scarcity is due to supply and demand fundamentals of rapid growth in demand in emerging economies and a "downshift in the trend growth of oil supply" -- IMF speak for peak oil.
- the impacts of oil scarcity are "important and far-reaching" on "growth, inflation, external balances, and poverty"
The report centres on three scenarios for oil scarcity. The most optimistic one has been seized upon by mainstream media such as The Economist, Bloomberg and the Wall Street Journal and paints a picture of an almost perfect world where oil production declines smoothly and gradually and the effect on world GDP growth is minimal. While the story has gained some traction in overseas media, it seems only Brian Farrow in the New Zealand Herald has picked up the story in New Zealand. He makes a reasonable fist of summarising the main findings, but like the overseas reports, fails to mention the more pessimistic peak oil scenario outlined in the report.
Even in the IMF's most optimistic scenario the oil price will spike immediately by around 60% and induce a reduction in GDP in oil importing countries such as New Zealand.
IMF Peak Oil Scenario
But the report itself points out that the adverse effects could be much larger depending on the "extent and evolution of oil scarcity". This is where there second and more pessimistic (realistic?) IMF scenario makes for fascinating reading. Fascinating because the IMF economists give serious consideration and credence to a scenario where oil production declines at 3.8% annually -- which is the type of oil decline scenario projected by peak oil proponents for many years.
But the most striking aspect of this scenario is that supply reductions of 3.8% would lead to an oil price spike of 200% immediately and 800% over 20 years. The IMF admits these price rises would be "unprecedented" and so huge that they blow their modelling off the chart. More likely is that the world economy descends into severe recession or a depression and prices never reach these heights?
How Is The Report Relevant to New Zealand?
Alarmingly for New Zealand the most severe impacts arise from particular vulnerabilities idendified by the IMF which all apply to New Zealand -
- we have high oil intensity
- we have weak export links to oil exporters -- most of our exports are to other oil importing countries such as Australia China etc
- our economy relies very heavily on on "airlines, trucking, long-distance trade and tourism" which the IMF points out " would be affected by an oil shock much earlier and much more severely than others"
- the effects of large-scale bankruptcies in such industries could spread to the rest of the economy
- what is even scarier for New Zealand as an oil importer is that the IMF acknowledges that it's scenarios for oil decline do not take account of oil exporters keeping more and more of their own product for domestic consumption. Studies show this is already happening , that exports are declining faster than production and the export decline rate accelerates with time. Which means the extent of oil scarcity is even more severe for New Zealand as an oil importer. What matters to us is not the scarcity levels of oil production per se, but how much oil is available for export.
Policy recommendations for government
The IMF suggests two broad policy review areas --
- get ready to adjust to any unexpected changes in oil scarcity
- lower the risk to oil scarcity including through the development of sustainable alternative sources of (transport) energy
Whichever way you cut it, it is quite remarkable that a group whose aim is to foster economic growth and stability is warning of not just oil scarcity, but resultant declines in world growth. No doubt our mainstream media and politicians will ignore this report as they have done with dozens of others. But unlike the global financial crisis, they will not be able to say that they were not warned.