WORLD ECONOMIC OUTLOOK: TENSIONS FROM THE TWO-SPEED RECOVERY
Figure 3.8. Projected Growth in Crude Oil Capacity (Million barrels a day) Despite the current investment effort, new net capacity in oil production will increase only modestly in the medium term given continued field declines in some major producers.
Former Soviet Union (FSU) OPEC1
Non-OPEC excluding FSU Total
2.0
1.5
1.0
0.5
0.0
-0.5 2010
11
12
13
14
15
Sources: International Energy Agency, Medium-Term Oil Market Report, June 2010 and December 2010 update. 1 Including spare capacity; OPEC = Organization of Petroleum Exporting Countries.
and speed of capacity buildup are usually characterized by a high amount of uncertainty. Indeed, project delivery was typically overestimated over the past few years, and some of the underlying risk factors are still present. Such risk factors include uncertainty about timeto-build lags, potentially rising investment costs if the global economy continues on a brisk expansion, and risks to investment regimes. In addition, there is considerable uncertainty about the future paths of decline rates in maturing fields (see Box 3.1). Finally, geopolitical risks, both short- and long-term, remain, and changes in oil scarcity could be accompanied by changes in the market shares of large producers. Therefore, there is a risk of larger-than-anticipated oil scarcity. The possibilities range from larger downshifts in trend supply growth to an outright decline in oil production, either temporarily or more permanently.22
What Are the Implications for Oil Scarcity? The main reason behind continued, if not increased, oil scarcity is the tension between, on the one hand, the downshift in oil supply trends by some ¼ to ½ percent, with further downside risk, and, on the other hand, the strong momentum in oil demand growth stemming mainly from rapid income growth in emerging market economies. The current WEO forecast is for an annual average world GDP growth rate of about 4.6 percent over the period 2011–15. The extent of market tension generated by these rates of global growth will depend on the income elasticity of oil demand. If a global short-term income elasticity of 0.68 (as estimated in the previous section) held throughout 2011–15, oil demand growth would remain above the growth in production at unchanged prices. Because price elasticities are very small, only substantial price increases would succeed in balancing the market, as described in the following example. At unchanged prices, if oil supply grows by 1.5 percent, 22For example, recent medium-term production forecasts by the U.S. EIA suggest annual oil production capacity growth of 0.9 percent over the period 2011–15. Other medium-term scenarios predicting low if any trend growth in oil production include British Petroleum (2011) and Shell (2011).
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International Monetary Fund | April 2011