World Energy Outlook 2006

Other recent studies also report significant macroeconomic effects from higher
prices. 14 A 2005 analysis by the International Monetary Fund quantifies the
macroeconomic effects of a short-lived sharp spike in oil prices on the global
economy. 15 International oil prices are assumed to average $80 in 2005 – an
increase of about $37 compared with the base case – falling back to the base
case level by 2009. In that first year, GDP growth in the industrialised
countries is projected to fall by 0.6 percentage points and by 0.8 points in
developing Asia and other net oil-importing developing and emerging market
economies (Table 11.5). Inflation would be one percentage point higher in the
industrialised countries. If the price increase is perceived to persist, the GDP
and inflation effects would be much more pronounced, with GDP falling by
as much as 1% in the industrialised countries and 1.3% in the oil-importing
developing countries. These estimates do not take account of the impact of a
sudden jump in prices on business and consumer confidence. The IMF
estimates that a severe fall in confidence could reduce US GDP growth by a
further 0.8 percentage points in the first year relative to the base case.
The US Department of Energy’s Energy Information Administration, at the
request of the IEA, also carried out a high oil price simulation, using the Global
Insight Global Scenario Model. 16 In the base case, the average international
crude oil price follows the same trajectory as in the Reference Scenario set out
in Part A of this Outlook. In the high oil price case, oil prices are assumed to be
40% higher in every year from 2007 through to 2025, equal to an average of
around $20 per barrel in real terms. Natural gas prices, which are
endogenously determined, rise more or less in line with oil prices; coal prices
rise by only half as much as oil prices. Real exchange rates were held constant
in the high oil price case. It was also assumed that governments do not make
discretionary changes to their fiscal policies to counter the effect of higher
energy prices. Central banks are assumed to adjust monetary policy to counter
part of the impact of higher prices on inflation.
For the world as a whole, the sensitivity of real GDP to oil prices in the high
price case is slightly less than that reported in the IEA’s 2004 study and other
recent studies that looked at the effects of a permanent increase in oil prices.
In addition, the period over which higher prices affect macroeconomic
14. See, for example, Barrell and Pomerantz (2004), Huntington (2005), Hunt et al. (2001 and
2002) and Jimenez-Rodriguez and Sanchez (2004).
15. See IMF (2005). The IMF provided the IEA with additional information on the results of this
analysis.
16. The model covers 22 major countries and regions, including China, India and the rest of
developing Asia.
Chapter 11 - The Impact of Higher Energy Prices 303
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© OECD/IEA, 2007