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Cambridge Econometrics Press Release
Back to the 1970s? The Global Impact of a $150 Oil Price
Cambridge Econometrics today releases an analysis of the global impact of a $150 oil price sustained through 2011 and 2012, produced using the E3MG global economic model. Although the oil intensity of GDP in the developed countries is much lower than in the 1970s, the results still show a substantial impact, wiping out the prospect of positive growth in many countries, and pushing some economies back into recession.
In March 2011 there is a perceived threat that higher oil prices, resulting from a combination of high demand and possible supply shocks in the Middle East, could derail the global economic recovery. Several economic commentators have referred back to the shocks in the 1970s when rising oil prices led to stagflation and social unrest. However, developed countries are now much less reliant on oil as an input than they were 30 years ago, so how real is this risk?
To address this question, we used the global econometric E3MG model to assess future growth prospects, with Brent oil prices set at $100 pb and then with oil prices set at $150 pb over 2011-12. In order to assess the risks we have assumed an economically worst-case outcome in that the additional revenues flowing to oil-producing states are held in sovereign funds and not reinvested in western economies. No policy responses are added.
The results show that the danger is indeed very real and sustained high oil prices (as opposed to the temporary shock pre-crisis in 2008) could cause major disruption to the global economic recovery, with inflation potentially pushing up towards double-digit rates. In this case world regions would see sharply slower growth over this period, and for some the risk of slipping back into recession is higher.
Further information, including the assumptions underpinning this analysis, is available on request.
| Download data... | Impact on GDP of a $150 oil price
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| UK | -1.7 | 0.2 | -1.5 |
| Rest of Europe | -1.2 | -0.6 | -1.8 |
| US | -1.7 | -2.3 | -4.0 |
| Japan | -3.2 | -0.6 | -3.7 |
| Rest of OECD | -2.9 | -0.7 | -3.6 |
| China | -3.5 | -0.2 | -3.7 |
| Rest of World | -1.2 | -0.2 | -1.4 |
| Notes: | 1 The table shows the impact on GDP growth (first two columns) and level (final column) compared with a case in which the oil price is $100 per barrel in 2011 and 2012. For example, the first column shows that the UK GDP growth rate is 1.7 percentage points lower in 2011 in the case where oil prices average $150 per barrel, compared with a case where they average $100.
| | Sources: | Cambridge Econometrics E3MG model (http://www.e3mgmodel.com).
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Notes for Editors
E3MG is a sectoral econometric model for the world that has been developed with the explicit intention of analysing long-term energy and environment interactions within the global economy and assessing short and long-term impacts of climate change policy. E3MG produces comprehensive annual forecasts to the year 2050, and long-term forecasts to the year 2100 and includes a set of fully endogenous technical progress indicators. The E3MG model provides a single-model framework in which detailed industry analysis is consistent with macro analysis; the key indicators, including world trade and technical progress, are modelled separately for each sector and region, and are aggregated to determine global impacts.
E3MG provides a highly disaggregated breakdown of economic activity (ESA-95 consistent) and energy use, based around the following model classifications:
•20 world regions, including explicit treatment of the US, Japan, India, China, Mexico, Brazil and the four largest EU economies
•42 industrial sectors based on the NACE classification, including 16 service sectors and disaggregation of the energy sectors
•28 consumer spending categories
•12 different fuel types, and 19 separate fuel user groups
•14 atmospheric emissions
Cambridge Econometrics is an independent private limited company and is owned by a charity, the Cambridge Trust for the Promotion of New Thinking in Economics. Our company also provides detailed regional and energy forecasts for the UK, and regional and sectoral forecasts for the European Union.
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For further information contact:
Hector Pollitt
Associate Director - International Modelling
Cambridge Econometrics
Covent Garden
Cambridge
CB1 2HT
UK
hp@camecon.com
www.e3mgmodel.com