IMF via Staniford

Staniford on the IMF – a must read on his ‘Early Warning’ blogsite:

an excerpt:

Holy crap: Scenario 2 in Chapter 3 includes a discussion of them doing an actual macroeconomic simulation of a post peak world in which oil production declines 2% a year! I’ve never seen any important government or international agency do that before: 

Another alternative scenario considers the implications of a more pessimistic assumption for the declines in world oil output—3.8 percent rather than 1 percent annually—accompanied by a 4 percent annual increase in real extraction costs per barrel rather than 2 percent (Figure 3.11). This implies that, barring any increase due to the supply response to higher prices, oil production declines by 2 percent annually—a scenario that reflects the concerns of peak oil proponents, who argue that oil supplies have already peaked and will decline rapidly.30 In this scenario, the longer-term output and current account effects are roughly three to four times as large as in the benchmark scenario, meaning they increase roughly in proportion to the size of the shock. Declines in absorption in oil importers are now on the order of 1.25 to 3 percent annually over the period shown, while in oil exporters, domestic absorption increases by more than 6 percent annu- ally. Current account deterioration in oil importers is also much more serious, averaging 6 to 8 percentage points of GDP over the long term.
The most striking aspect of this scenario is, how- ever, that supply reductions of this magnitude would require an increase of more than 200 percent in the oil price on impact and an 800 percent increase over 20 years. Relative price changes of this magnitude would be unprecedented and would likely have nonlinear effects on activity that the model does not adequately capture. Furthermore, the increase in world savings implied by this scenario is so large that several regions could, after the first few years, experi- ence nominal interest rates that approach zero, which could make it difficult to carry out monetary policy.

Translation: your peak oil scenario breaks our simulation model…


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