Oil Price Developments: Drivers, Economic Consequences and Policy Responses

Abstract:     
This paper analyses the factors influencing the price of oil and its likely evolution over the next quarter century. It begins by investigating the fundamental forces shaping long-term oil price developments, highlighting the importance of growth-led demand for oil, particularly that emanating from fast-growing, energy-intensive developing countries, and the implications of increasingly geographically concentrated oil reserves. The paper presents oil price projections to 2030 and examines the sensitivity of the projections to the assumptions about growth and non-OPEC supply. While certain combinations of factors could lead to a significantly higher oil price, the projections also suggest that the optimal strategy of resource-rich oil producers would be to prevent it rising too far. The paper then documents short-term influences on the oil price, which peaked at $50 a barrel in 2004, and notes that they have probably led to a significant departure from the long-run equilibrium price which could persist for some time. Finally, the paper assesses the effects of higher oil prices on OECD-area economic activity and inflation. It argues that these effects have diminished over time, but that monetary policy should remain vigilant in preventing second-round effects on inflation. At the same time, fiscal policy should remain orientated towards long-term goals while structural policies should assist in the development of greater transparency in oil markets.

Number of Pages in PDF File: 51

Keywords: Crude oil, energy, market structure

JEL Classification: L13, Q41, Q43, Q48

working papers series