Oil and the World Economy: Some Possible Futures

Abstract

This paper, using a six-region DSGE model of the world economy, assesses the GDP and current account implications of permanent oil supply shocks hitting the world economy at an unspecified future date. For modest-sized shocks and conventional production technologies the effects are modest. But for larger shocks, for elasticities of substitution that decline as oil usage is reduced to a minimum, and for production functions in which oil acts as a critical enabler of technologies, GDP growth could drop significantly. Also, oil prices could become so high that smooth adjustment, as assumed in the model, may become very difficult.

Keywords: Oil production, Demand, Supply, Oil prices, External shocks, Price elasticity, Economic models, Exhaustible resources, fossil fuels, oil depletion, Hubbert's Peak, externalities., oil prices, oil exporters, exporters, oil importers, world economy, elasticity of substitution, oil shock, market equilibrium, exporting countries, transition period, oil exports, capital flows, output growth, domestic demand, balance sheets, oil imports, aggregate demand, intermediate goods, external shocks, world growth, equilibrium model, world output, oil revenues, global supply, oil-exporting countries, domestic price, current account surplus

JEL Classification: C11, C53, Q31, Q32