World Energy Outlook 2006

CHAPTER 11
THE IMPACT OF HIGHER ENERGY PRICES
HIGHLIGHTS
� The price of crude oil imported into IEA countries averaged just over
$50 per barrel in 2005, almost four times the nominal price in 1998 and
twice the 2002 level. Prices continued to rise strongly through to mid-
2006. Real prices paid by most final energy consumers have increased far
less than international prices in percentage terms, because of the cushioning
effect of taxes and distribution margins and, in some countries, subsidies
and a fall in the value of the dollar. We estimate that consumption subsidies
in non-OECD countries amount to over $250 billion per year.
� Strong demand for energy, driven by exceptionally fast economic growth,
has helped drive up oil and other energy prices since 1999, but there are
signs that higher prices are now beginning to curb demand growth. All the
same, oil demand is becoming less sensitive to changes in final prices as
consumption is increasingly concentrated in transport, where demand is
least price-elastic. Income remains the primary driver of demand for oil,
gas, coal, and electricity, demand for all of which has continued to grow
strongly, with incomes, in most regions.
� Oil prices still matter to the health of the world economy. Although most oilimporting
countries around the world have continued to grow strongly, the
world economy would have grown even more rapidly had oil prices and
other energy prices not increased – by 0.3 percentage points per year more
on average since 2002. The loss of real income and the adverse impact on the
budget deficits and current account balances of importing countries were
proportionately greatest for the most heavily indebted poor countries.
� The eventual impact of higher energy prices on macroeconomic prospects
remains uncertain, partly because the effects of recent price increases have
not fully worked their way through the economic system. There are
growing signs of inflationary pressures, leading to higher interest rates. The
longer prices remain at current levels or the more they rise, the greater the
threat to economic growth in importing countries.
� There are major benefits for importing countries, in terms of price, security
and economic welfare, of reducing reliance on imported oil and gas. This
requires policies to stimulate indigenous production of hydrocarbons and
alternative sources of energy and improve energy efficiency. The removal of
energy subsidies and economically efficient pricing and taxation policies
can play a major role in achieving this goal.
Chapter 11 - The Impact of Higher Energy Prices 269
© OECD/IEA, 2007