IMF Warns of Oil Scarcity

The Citizen (Dar es Salaam)

Alawi Masare

17 May 2011

Oil is likely to be scarce in the world market in the near future following a rapid increase in demand in emerging economies and a decrease in supply, the International Monetary Fund (IMF) has warned.The IMF’s latest World Economic Outlook (WEO) report indicates that increases in oil prices suggest that the global oil market has entered a period of increased scarcity caused mainly by increased demand in emerging economies.

The IMF says policymakers should take precautionary measures by ensuring the current policy frameworks are ready for changes and risks brought about by the scarcity.

“The analysis of demand and supply prospects for crude oil suggests that the increased scarcity arises from continued tension between rapid growth in oil demand in emerging market economies and the downshift in oil supply trend growth,” the reports says.

It adds: “If the tension intensifies, whether from stronger demand, traditional supply disruptions, or setbacks to capacity growth, market clearing could force price spikes, as in 2007-08.” However, the report downplays the role of oil scarcity on the growth of the global economy, saying it may present a minor constraint if it involves a gradual decrease in supply rather than an absolute decline.

“The analysis suggests that oil scarcity will not inevitably be a strong constraint on the global economy. However, the risks it poses should not be underestimated either.”

According to the IMF, a sizable downshift of one percentage point in oil supply trend growth appears to slow annual global growth by less than 0.25 per cent in the medium and longer term and a persistent decline in oil supply levels could have sizable negative effects on output even if there is greater substitutability between oil and other primary energy sources.

“The expected strengthening of oil prices in 2011 will help sustain the recovery in the region’s oil exporters. Following the sharp rebound in oil production last year in Nigeria, oil output is expected to stabilise this year, and the economy is set to expand by 7 per cent.”

The report notes further that most other oil exporting economies are planning to use the buoyancy of global oil markets as an opportunity to return to fiscal surpluses and rebuild reserves, but fiscal policy remains gloomy in Nigeria due to the failure to adhere to the oil-price-based fiscal rule, which links spending to long-term average oil prices.

The IMF forecasts an annual average world GDP growth rate of about 4.6 per cent over the 2011-15 period.

The analysis also suggests that more effects would depend on the extent and evolution of oil scarcity, which remain uncertain.

The report asks policymakers to strengthen measures to reduce the risks from oil scarcity as a precautionary step and to facilitate adjustment if such shifts are larger than expected or materialise in an abrupt manner.

“Policies need to be complemented with efforts to strengthen social safety nets, because higher oil prices could lead to shifts in income distribution and to increased poverty.”

Regarding policies aimed at lowering the worst-case risks of oil scarcity, a widely debated issue is whether to reduce oil consumption – through taxes or support for the development and deployment of new, oil-saving technologies – and to foster alternative sources of energy.

Such interventions, if well engineered, would smoothly reduce oil demand and rebalance tensions between demand and supply. This will, in turn, reduce the risk of worst-case scarcity itself, according to the IMF.

The fund calls for the strengthening of the role of price signals in the adjustment to increased scarcity. Such policies would increase the price responsiveness of supply and demand thereby allowing for smaller price responses to unexpected changes in scarcity.

The prices of crude oil have increased in the world market, causing the fluctuation of prices of other commodities. In January this year, the spot price of a barrel of Brent crude oil crossed the $100 threshold.

The prices of many other commodities have risen as a result to reach or surpass their pre-crisis peaks, but the IMF report says there is a possibility of prices increasing further in the next year or two.

At current high levels, warns the report, commodity price developments and prospects can have important global economic repercussions. The report also warns that rising energy prices will spill over into core inflation, affect external balances and increase poverty, and that there are important linkages between global economic conditions and commodity prices and large fluctuations in commodity prices over the global cycle.

Nevertheless, persistent commodity price increases in recent years point to a break with the experience of the 1980s and 1990s as well as with the experience of earlier commodity price booms.Oil is a key factor of production, including in the production of other commodities and in transportation, and is also a widely used consumption good.

Available IMF data shows that oil is the most traded commodity, with world exports averaging $1.8 trillion annually during 2007-09, which amounted to about 10 per cent of total world exports in that period.

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