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Price of oil could double in a decade, warns IMF paper

A working paper commissioned by the IMF says previous trends in oil prices point to a major surge in costs by 2022.
May 14th 2012, 9:53 AM 2,200 24

THE PRICE OF OIL could permanently rise to around double its current level in the next decade, a working paper commissioned by the IMF has warned.

The ‘Future of Oil’ paper, which claims not to represent the views of the IMF but which nonetheless lists the IMF’s staff economists among its writers, says increasing demand will clash with tightening supply to force prices up.

“Our prediction of small further increases in world oil production comes at the expense of a near doubling, permanently, of real oil prices over the coming decade,” the paper warns.

“This is uncharted territory for the world economy, which has never experienced such prices for more than a few months.”

A graph showing the projections of how the price of oil could rise over the next decade. Image: IMF

The paper suggests that a major technological revolution would be required to avert the spike in prices, as demand for oil is relatively inelastic – meaning that rising prices do not necessarily has quite as big an impact as one might suggest.

The paper notes how there is only a “finite limit to the extent that machines (and labour) can substitute” one form of energy for another, meaning that an increase in prices – perhaps to a point where some industries simply could not afford oil – could pose massive challenges.

“Our empirical results also indicate that if the model’s predictions continue to be accurate as they have been over the last decade… the future will not be easy.”

It further notes that a shock to oil supplies could have an impact on global economic output, noting varying estimates that energy accounts for between 3.5 per cent and 50 per cent of overall GDP levels.

“It is clear that if this [upper estimate] can be confirmed in further rigorous econometric studies, theimplications of lower oil output growth for GDP could be very large,” it states.

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Gavan Reilly


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