Bookmark and Share

Saturday, April 16, 2011

IMF Warns of Oil Scarcity And End of "Growth"

Follow denistegg on Twitter

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 !

IMF's Main findings
  • 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"
Optomistic Scenario
The report centres on three scenarios for oil scarcity. The most optimistic one has been seized upon by mainstream media such as The EconomistBloomberg 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.

In this scenario the effect on GDP and nation's current accounts is to put it mildly severe and downright scary. As you can see from the graph left - (blue line = optimistic scenario and red dotted line = peak oil scenario) for the USA (the closest to New Zealand's oil dependence situation?) there would be a 4 to 5% reduction in GDP within five years and a 14% reduction in 20 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 --
  1.  get ready to adjust to any unexpected changes in oil scarcity
  2.  lower the risk to oil scarcity including through the development of sustainable alternative sources of (transport) energy
But expect the New Zealand government to ignore this advice, just as they have ignored International Energy Agency calls for critical government intervention
    Tthe IMF also suggests that governments could also "pre-emptively reduce oil consumption through taxation or support for new oil-saving technologies".  Fat chance of that happening.  Our Energy strategy is not to pick winners and there is next to zero support for bio fuels and electrification, and the government won't impose an earthquake levy even when most kiwis support it.

    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.


    Anonymous said...

    Thanks Denis, you're doing an amazing job getting this info out there for us who have recently got our heads out of the sand but are still running around in circles in panic.
    Man, once the big dudes in the world like IMF start admitting this stuff it's a pretty sure sign things will go ka-blooey and that right soon.

    Denis Tegg said...

    Thats OK ... think of it as a public service. The more of us that personally move from panic mode to active resilience building the better. spread word of the blog thru Facebook or other networks..

    Kevthefarmer said...

    Our government is actively opposing the building of resilience into New Zealand society in order to deliberately but surreptitiously take us down the path into neo-colonial fealty to global capital. When the world economy falters and, being unprepared and in horrendous but avoidable debt (example; 1.6 billion baleout for South Canterbury Finance "investors"(=amateur speculators)), we are forced to sell off our land and resources to the financal elite of which Mr Key is both servant and minor member, then their dastardly work will be done. New Zealanders seem to believe that as nation they "punch above their weight", they think that they are Premier League in the world economy because the country produces food and the world needs to eat. I've got news for you- agricultural production may be a big deal for New Zealand, but NZ's production is small beer in the global picture of things. As people around the world become poorer and hungrier, they will stop buying our milk and meat in favour of cheaper, locally produced food, i.e. grains and potatoes, and our debt ridden farmers will fail. The banks will get their farms. Key's pals win again. In OECD terms, NZ is actually in the same league as Portugal and Greece, two of the "failed economies" of Europe- but we have no European Union to bail us out- we stand or fall on our own initiative.

    Anonymous said...

    i asked a girl on facebook what she thought of peak oil. she said "what ? ... that sounds boring" . heaven help us.

    David Welch said...

    Hi Denis - thabnks for your great blog . I already put a side bar link of my public transport advocacy site a few weeks back - now I've even nicked your text as per this - Hope you don't mind - if so I can take it to bits and remove same. Ideally it will send more folk your way. (I couldn't get through on your contact system)

    Denis Tegg said...

    David. No problem. Thanks for the link and always happy for you to quote from oshp cheers Denis

    Post a Comment