World Energy Outlook 2006

Member countries, will rise from 2.8% in 2005 to 3.1% in 2006, and then fall
back to 2.9% in 2007 (OECD, 2006). But both the IMF and the OECD
suggest that a renewed surge in oil prices, together with ever-worsening current
account imbalances and abrupt exchange rate realignments, long-term interest
rate rises and a slump in asset prices, represents the biggest risk to near-term
global macroeconomic prospects. Global imbalances will need to be resolved at
some point. The question is when and how quickly. One possibility, even
without fiscal policy action, is an orderly adjustment in imbalances led by the
private sector, involving an increase in private US savings, higher interest rates,
a slowdown in house prices and a substantial real exchange rate adjustment.
But another is a much more abrupt and disorderly adjustment, characterised by
a substantial overshooting of exchange rates and a big jump in interest rates,
and resulting in a sharp contraction of global activity. An increase in wage
inflation cannot be ruled out, particularly if real incomes stall for a prolonged
period.
Energy Policy Implications
Higher energy prices have important implications for energy policy. They
reinforce the economic and energy-security benefits of diversifying away from
imported oil and gas – a major policy objective of IEA Member countries as
well as other oil-importing countries. This can be achieved through efforts to
stimulate indigenous production of hydrocarbons and alternative sources of
energy, such as biofuels, other renewable energy technologies and nuclear
power, as well as through energy efficiency measures. Market and regulatory
reform can contribute to lowering supply costs, thereby offsetting at least part
of the effect of higher primary energy prices.
Most countries are considering anew stronger policies and measures to reduce
oil-import intensity for economic, security and/or climate-change reasons.
Such policies are of particular importance to countries with relatively high
oil-import intensities. There is a large potential to improve the efficiency of
energy use in developing regions, given the relatively inefficient energy capital
stock currently deployed and the extent of the new investment in energy which
is required there. Faster deployment of the most efficient technologies will be
needed for this potential to be realised. All oil-importing countries would
benefit from reduced imports in developing countries, as this would relieve
upward pressure on international oil prices. The economic benefits from
reduced oil-import intensity could be substantial in the longer term. In the
Alternative Policy Scenario, new energy policies aimed at reducing energyimport
dependence and greenhouse-gas emissions reduce the annual oil-import
bill by $0.9 trillion for OECD countries and $1 trillion for developing Asian
countries by 2030. China alone would save $0.5 trillion and India
Chapter 11 - The Impact of Higher Energy Prices 313
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