The Unassuming Economist

This paper by my IMF colleagues presents “a simple macroeconomic model of the oil market. The model incorporates features of oil supply such as depletion, endogenous oil exploration and extraction, and features of oil demand such as the increase in demand from emerging markets, usage efficiency, and endogenous demand responses. The model provides, inter alia, a useful analytical framework to explore the effects of: a change in world GDP growth; a change in the efficiency of oil usage; and a change in the supply of oil. The model shows that small shocks to oil supply or demand can result in large movements in the price of oil over time. It would not take a large shock for oil prices to return to significantly higher levels, and the long lags between oil price changes and the response of oil supply and demand to those changes can lead to cycles in oil prices in the future.”

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