The effect of changes in the price of oil on world economic growth

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					Oil prices and economic growth                              44                                     Global Oil Report

                         The effect of changes in the price
                         of oil on world economic growth
                                                 (5th March 2004)

                                                   Executive Summary

              Economic growth is generally acknowledged to be the main driver of oil demand and for this
              reason much attention in the oil business is focussed on the state of the world economy.
              However, what about the impact of changes in the oil price on economic growth? Could oil
              price movements have a significant effect on the global economy when the oil industry’s value
              in 2003 amounted to only 4% of global GDP? Is it not a case of the tail wagging the dog?

              Prior to the first oil price crisis in 1973 global economic growth seemed divorced from
              variations in the oil price. Since then, the world has experienced three universal economic
              recessions, defined by economists as years when the global economic growth rate was below
              2.2%. On each occasion the recession was preceded by sharp rises in the price of oil. During
              the latest recession in 2001, world growth stood at 1.6% following a year (2000) in which the
              price of oil had increased by 46%. It therefore seems fair to say that large increases in the oil
              price do affect world economic growth adversely, but how exactly does this happen?

              A change in the price of oil affects the demand for oil, which is a component of consumption;
              consumption in turn constitutes the largest slice of GDP. Naturally, the larger the oil price
              change the bigger the negative effect on oil consumption and the larger the final effect of such
              a change on GDP. However, the full effect of an oil price change on economic growth does
              not feed through straight away. There is a much smaller impact effect that takes place within
              a year and a much larger full-adjustment effect that manifests itself years later.

              The CGES estimates that the large 33% global oil price increase of 2000 knocked only 0.2
              of a percentage point off world GDP growth within that year. However, the negative effect of
              that increase on global economic growth after thirteen years is much greater, at 1.2 percentage
              points. In very broad brush terms, average global nominal GDP during the period 2012-16
              will be $2,238bn lower because of the oil price (and US Dollar and world GDP deflator)
              changes observed during the years 1999-2003, all other things being equal. What happens
              to the oil price today does matter for the future too.

March - April 2004                                     CGES                                              Volume 15 Issue 2

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