The High Price of Oil: A Threat to Global Economy Recovery

Strategic Insights -

Rising oil prices have the world's economy watching with concern, particularly in light of the significant increase in demand forecast by the International Energy Agency (IEA). Despite output seemingly rising faster, the IEA's report suggests demand growth will be the highest in 16 years, with China and North America driving the increase. The Organization for Economic Co-operation and Development (OECD) members' production is expected to decline, but non-OPEC oil producers will see a 2.3m barrels a day rise in production. Meanwhile, OPEC production rose by 3.3m barrels a day between 2002 and April this year, nearly enough to meet the increase in world consumption.

Key Takeaways:

  • Forecasts suggest global oil demand will increase by 3.6m barrels a day between 2002 and 2004, with China accounting for 36% of this increase.
  • Non-OPEC oil producers are forecast to see a 2.3m barrels a day rise in production between 2002 and 2004.
  • OPEC production rose by 3.3m barrels a day between 2002 and April this year, nearly enough to meet the increase in global oil demand.
  • The IEA reports an excess of 1.2m barrels a day in the first quarter of this year, suggesting either under-reported demand or a need for a big build-up of inventories.
  • A sustained $10 increase in oil prices from $25 to $35 would lower world GDP by at least 0.5% in the following year, according to the IEA's analysis with the OECD.
  • The transfer of income from importers to exporters would be $150 billion, close to 0.5% of global product, also in the following year.
  • Oil-importing developing countries would be particularly hard hit due to their heavy reliance on oil and limited access to world capital markets, with estimated losses of 0.8% in Asia and 1.6% in poor, highly indebted countries.
  • The IEA's analysis suggests that sustained high oil prices could have a significant but not dramatic impact on the world economy, although this could change if prices were to rise again.
  • The US Department of Energy forecasts oil prices to fall between $18 and $33 in 2010 and remain low in 2025.
  • OPEC production is expected to rise significantly, from 30m barrels a day in 2002 to 56m in 2025, while the rest of the world's output is expected to rise from 48m to 65m.

Statistics:

  • The IEA forecasts global oil demand to increase by 3.6m barrels a day between 2002 and 2004.
  • Non-OPEC oil producers are forecast to see a 2.3m barrels a day rise in production between 2002 and 2004.
  • OPEC production rose by 3.3m barrels a day between 2002 and April this year.
  • The excess of 1.2m barrels a day in the first quarter of this year suggests either under-reported demand or a need for a big build-up of inventories.
  • The transfer of income from importers to exporters would be $150 billion in the following year.
  • Oil-importing developing countries are estimated to lose 0.8% in Asia and 1.6% in poor, highly indebted countries.
  • The US Department of Energy forecasts oil prices to fall between $18 and $33 in 2010.
  • The OECD member countries would see a GDP loss of 0.4% in the first and second years, with Eurozone countries losing 0.5% and inflation rising by 0.5% in the first year.

Sources:

  • International Energy Agency, "Oil Market Report, May 12 2004"
  • International Energy Agency, "Analysis of the Impact of High Oil Prices on the Global Economy, May 2004"
  • US Department of Energy, "International Energy Outlook 2004"