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Oil and the World Economy: Some Possible Futures

Author: Michael Kumhof and Dirk Muir
Organisation: International Monetary Fund
Publish Date: October 2012
Country: Global
Sector: Petroleum
Theme: Futures
Type: Other publication
Language: English
Tags: Exhaustible resources; fossil fuels; oil depletion; Hubbert's Peak; externalities.

This paper, using a six-region DSGE model of the world economy, assesses the GDP and current account implications of permanent oil supply shocks hitting the world economy at an unspecified future date. For modest-sized shocks and conventional production technologies the effects are modest. But for larger shocks, for elasticities of substitution that decline as oil usage is reduced to a minimum, and for production functions in which oil acts as a critical enabler of technologies, GDP growth could drop significantly. Also, oil prices could become so high that smooth adjustment, as assumed in the model, may become very difficult.
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