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Oil Prices ‘Likely’ To Remain High For Foreseeable Future – IMF

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The recent trend increase in oil prices suggests that the global oil market has entered a period of increased scarcity, where oil prices are likely to remain high for the foreseeable future, the International Monetary Fund (IMF) said Thursday.

The IMF’s World Economic Outlook (WEO) indicated that origins of this scarcity can be traced to the “tension between the upward shift in global oil consumption growth due to fast-growing emerging market economies and supply constraints, which have led to a downshift in oil supply growth.”

It said that the latter “partly reflects the drag from a growing share of maturing oil fields, which have raised both the production and the opportunity cost of bringing an additional barrel to the market.”

The Outlook noted that scarcity is reinforced by “the low responsiveness of both oil demand and oil supply to price changes, especially in the short-to-medium term.”

“Nevertheless, the longer-term income elasticity of global demand for oil is below that of the demand for primary energy,” it added.

According to the report, it would be premature to conclude that oil scarcity will inevitably be a strong constraint on global growth.

The IMF’s simulation analysis shows that “gradual and moderate increases in oil scarcity, consistent with supply projections by others, may only be a minor constraint on global growth in the medium to long term.”

According to the Outlook, an unexpected sizable downshift in oil supply trend growth of 1 percentage point, from 1.8 percent to 0.8 percent, slows annual global growth by less than 0.25 percent in the medium and long term.

“However, such benign effects on global growth should not be taken for granted since scarcity or its growth effects could be more significant,” it stressed.

It said that there are “downside risks to supply, including from geopolitical risks that imply that oil scarcity could be more severe and may materialize in large and abrupt changes.” It affirmed that the growth effects would be “correspondingly larger.”

In addition, it is “uncertain” whether the world economy can adjust “as smoothly to increased scarcity as we assume, given redistribution and sectoral shifts,” saying “the growth effects could be larger, depending on the impact on productivity.”

“A persistent adverse oil supply shock would imply a surge in global capital flows from oil exporters to importers and a widening of current account imbalances,” the WEO noted.

This underscores the need “to reduce the risk associated with growing current account imbalances and large capital flows.”

“Continued progress in financial sector reform is also critical, as the efficient intermediation of these flows is a prerequisite for financial stability,” it affirmed.

According to the Outlook, there are two broad areas for policy action to mitigate the impact of oil scarcity.

“First, given the potential for unexpected large increases in the scarcity of oil, policymakers should review whether current policy frameworks facilitate the adjustment to such events: macroeconomic policies to ease adjustment in relative prices and resources and structural policies to strengthen the role of price signals would be desirable,” it indicated.

It added that “second, consideration should be given to policies aimed at lowering the risk of oil scarcity, including through the development of sustainable alternative sources of energy.”

KUNA

KUNA

KUNA is the Kuwait News Agency

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