(EnergyAsia, May 29 2012, Tuesday) — Despite a four-fold increase in oil prices over the past decade, the world has coped well by becoming more energy efficient, holding back wage increases, diversifying to other energy sources and using macroeconomic policy to mitigate oil’s inflationary effects, said a study by the International Monetary Fund (IMF).
World benchmark crude Brent surged from around US$25-$30 a barrel in 2002 to US$105-$120 in recent months. It climbed to a record high of over US$145 in July 2008, triggering a short bout of global economic recession that was quickly overcome by two rounds of money printing by the world’s central banks.
Importantly, the IMF study said the sharp oil price increases have not triggered the economic devastation of the extent of the 1970s and 1980s. It attributed the difference to a combination of improved central bank policies and coordination, greater recycling of oil profits by producing countries, increased energy efficiency and use of technology, and reduced reliance on oil as countries diverisified their energy mix.
Ironically, the study also found that rising demand from emerging economies, often blamed for the oil price surge, played a part as it stimulated fresh supply from existing and new sources around the world, helping the world avoid a repeat of the two past oil shocks that were largely caused by severe supply disruptions.
The IMF findings could yet prove premature and even debatable amid the on-going crisis in the Euro-zone economies, the uncertainty of recovery in the US together with the prolonged high rates of unemployment, under-employment and wage stagnations in many developed countries that some economists have argued were partly caused by the arrival of US$100 oil in 2008.
The IMF’s praise for the central banks for being “adept at dealing with price shocks” could be countered by criticisms that in the first place, the banks caused, rather than mitigated, the price inflation of oil and other commodities through their abetment of financial speculation, reckless lending and subsequent quantitative easing policies. The end game from unleashing trillions of dollars in the electronic printing press is still being played out.
The study noted that in the 1970s and 1980s, oil price rises triggered fears of inflation, and workers would try to protect themselves by demanding higher nominal wage increases. This had the effect of setting off wage-price spirals, which doesn’t exist today.
“Now, greater awareness of the impact of high wage increases, including lost employment and reforms to labour markets, have led to more job-friendly wage setting. Central banks have become more adept at convincing workers that oil price increases will not feed through into inflation,” said the IMF.
It could be argued that increasingly powerless workers, rather than the overall economy, are the ones suffering long-term economic depression through permanent job losses and wage cuts, along with indications that the middle class in developed countries is also being decimated. If anything, the working and middle classes in the developed countries could be suffering far worse consequences from high oil prices now than they did in in the 1970s and 1980s.
High oil prices have clearly brought benefits to many developing producing countries in Central Asia, West Africa, Asia and Latin America, and boosted living standards in established producers in the Middle East and elsewhere.
The IMF notes: “The strong growth of emerging markets has benefited both them and the global economy: raising living standards and increasing their demand for products made abroad,” said the study.
“A side-effect of this may have been an increase in oil prices, but this has not derailed the benefits of increased growth.”
But even this piece of positive news could be qualified as high oil prices have encouraged many of the world’s developing oil producing nations to become more autocratic and corrupt, to increase their military and security spendings, and slow down attempts to increase economic diversification as they became more dependent on resource earnings.
In the Middle East, high oil prices raised the stakes, triggering the events of the Arab Spring from 2010 that are still playing out with no sign of certainity or stability returning.
The IMF highlighted the role of increased efficiency and improved technology in blunting the impact of what otherwise might have been an oil shock.
“Oil price shocks do not have the same impact as in the past because economies have become more efficient in the use of energy. The amount of energy it takes to produce a dollar of income has been steadily declining for 40 years. This decline in energy intensity is expected to continue,” it said.
Just as important, the study reported that major emerging markets are also becoming more efficient in their energy use. By 2030, it expects the world’s major consumers including the US, China, and India to have the same energy intensity.
The study does not separate the components of the GDP to show up the size of wealth generated from the financial markets linked to quantitatve easing and other acts of monetary easing over the last decade.
Source for Charts 2 and 3: IMF