The Unassuming Economist

The IMF just released this commodity markets review as part of its World Economic Outlook. The review provides the outlook for energy, metals and food markets.

It also discusses:

• the tight link between commodity prices and global demand;
• impact of Chinese growth on base metals;
• the supply-demand balance in oil markets;
• the vulnerabilities of countries to food price shocks.

We hope you find the review useful. The review is a public document and can be cited without prior permission. Questions and comments can be sent to rescommodities@imf.org

The energy market in 2011 was characterized by disruptions and continuity. Political unrest and violence caused outages in oil and gas production in parts of the Arab world. On the other hand, the world economy benefited from an exceptional swing in European weather, the first release of strategic petroleum reserves since 2005 and an increase in OPEC production.

Christof Rühl, Group Chief Economist of BP spoke to the Fund staff on June 14.

Photo: Michael Spilotro/IMF

Last year, the Arab Spring caused significant interruption in the production and supply of oil. For example, the cessation of Libyan oil exports alone removed 1.2 millions of barrels per day of crude oil for the year. Moreover, in April, the earthquake in Japan damaged the Fukushima nuclear reactor which led to closures of nuclear plants in Japan and Europe. This resulted in losses of 43 millions of tons of oil equivalent, which is more than 11 percent of the European oil consumption. In 2011, average annual Brent prices increased by 40% to reach $111 per barrel. On a related note, huge floods in Australia impaired coal production.

So, with all the chaos, how did the energy market remain resilient? There was the first release of strategic petroleum reserves since 2005. There was a petroleum sale of 30 million barrels non emergency to offset disruptions caused by political upheaval in Libya and elsewhere in the Middle East. The amount was matched by IEA countries for a total of 60 million barrels released from stockpiles around the world. Also, there was the largest increase in OPEC production since 2008 and a mild winter in Europe.

In 2011, energy consumption stayed steady in Non-OECD countries, while it declined in OECD countries. Non-OECD energy consumption stayed firm, in contrast, OECD energy consumption fell by 0.8 percent, despite average GDP growth. Energy consumption in OECD countries has declined in three out of the last four years. Why last year? First, the impact of high oil prices everywhere and of high coal and gas prices outside the US. Second, the decline was due to the impact of Fukushima nuclear disaster. And third, Europe experienced a mild winter in 2011 compared to 2010.

What was the impact of high oil prices on oil importers? The overall effect of how high oil prices affect oil importers depends on how oil exporters use the additional income generated by higher prices. This extra income can be recycled in two ways – they can spend it to purchase goods and services from oil importing countries, this will offset the high import bill in oil consuming countries or they can spend it by purchasing foreign assets which increase the global supply of savings leading to low interest rates and low borrowing costs around the world. But, with interest rates close to zero, this option loses its meaning.

Photo: Michael Spilotro/IMF

Photo: Michael Spilotro/IMF

Photo: Michael Spilotro/IMF

BP has a surprisingly cheerful energy outlook for 2030.

Energy intensity—the amount of energy it takes to produce a dollar of income—has been continuing a steady downward march for 40 years, and BP expects this to continue. By 2030, the major regions of the world—the U.S., China and India—will have the same energy intensity. Energy use will be diversified across sources: oil, coal, and gas will each have a 30% market share, with hydro, nuclear and renewables accounting for the remaining 10%.

Energy supply from the Americas—US and Brazilian biofuels, Canadian oil sands, Brazilian deepwater and US shale oil—will help in balancing supply and demand in 2030. 

Vehicle ownership (per person) will hit saturation in the rich nations. And while it will grow in China and India, it will follow a slower path than seen historically in other countries. 

If we could keep politics out of the picture, we could have an energy outlook by 2030 in which the America are largely energy self-sufficient, the FSU supplies nearby Europe, and the Mid-East and Africa take care of the needs of the Asia-Pacific. 

Import dependence in 2030 is projected to be higher than it is today for all major energy importers—Europe, China and India—but will decline for the United States. BP predicts that by 2030 “the import share of oil demand and the volume of oil imports in the US will fall below the 1990s levels, largely due to rising domestic shale oil production and ethanol displacing crude imports. The US will also become a net exporter of natural gas.”