Tag Archives: Aggregate Supply

Oil Shocks – are they bad for the global economy?

Tobias Rasmusses and Agustin Roitman, two IMF economists, in a recent paper have argued that oil shocks are not that bad for an importing country. They have suggested that a 25% increase in oil prices will cause a loss of real GDP in oil-importing countries of less than 0.5%, spread over two to three years.
“One likely explanation for this relatively modest impact is that part of the greater revenue accruing to oil exporters will be recycled in the form of imports or other international flows, thus contributing to keep-up demand in oil-importing economies”
However in considering the impact of higher oil prices one must look at what caused them to rise in the first place. There have been supply-side and demand-side reasons.

1973 – 400%↑ – supply-side– Yom Kippur War oil embargo
1979 – 200%↑ – supply-side – Iran Iraq War
1990 – 50%↑ – supply-side – Iraq War
2000 – 75%↑ – demand-side – Global growth.

What it is important to remember is that when there is higher global growth there likely to be higher oil prices, which is a positive. Supply-side policies also play a role – 1970’s and 1990-91 – especially the disruption to supply in Libya this year. “Finding that the negative impact of higher oil prices has generally been quite small does not mean that the effect can be ignored.”
Rasmusses and Roitman do not rule out more adverse effects from a future shock that is driven largely by lower oil supply than the more demand-driven increases in oil prices that have been the norm in the last two decades.