The Impact of Oil Price Increase on the Global Economy

Hyun Joon Chang

Korea Energy Economics Institute

1. Introduction

The global economy experienced two oil shocks during the last three decades. The first

occurred in 1973 following the Arab-Israeli War. It contributed to causing the first significant

oil price increase by OPEC. In October 1973, Arab members of OPEC declared an embargo

on exports. As a result, crude oil prices increased from an average of $4.15 per barrel in 1973

to $9.07 in 1974. The second took place in 1979. In the late 1970s, political unrest in the

Mid-East created conditions for the dramatic oil price increases of 1979-1981. The

government under the Shah of Iran, supported by the U.S., was the center of turmoil. When

anti-west Islamic fundamentalists gained control of the country during the Iranian

Revolution, Iranian oil production declined dramatically, leading to huge price increases.

Crude oil prices increased from $12.46 per barrel in 1978 to $35.24 in 1981.

In an economic sense, an oil shock is defined as an increase of oil price large enough to cause

a recession or a significant decline in global economic activity. The 1973 and 1979 episodes

both qualify as oil crises by the definition. In 1974, GDP growth rate in OECD was 0.3

percent, -2.2 percent in US, -3.3 percent in Japan, and –0.5 percent in UK. In 1980, growth in

OECD was 1.0 percent, -0.8 percent in US, 5.4% in Japan, and –3.0 percent in UK.

Especially, the 1979 oil price increase put the industrial economies into a recession, this time

the worst recession since the Great Depression. Inflation skyrocketed. For instance, U.S.

inflation peaked at 13.5 percent in 1980, averaging 10.3 percent in the 1979-82 period.

Since March 1999, the global economy has experienced another sharp increases in oil price.

In early 1999, most petroleum analysts viewed oil prices as artificially low, and the resulting

low prices cut revenues to oil exporting countries. To address this situation, OPEC met in

March 1999 and agreed to cut production, with goal of increasing crude prices to around or

just above $20 per barrel. Although compliance to previous OPEC agreements had been

difficult to maintain, adherence to this agreement has generally been good. Crude oil prices

rose immediately, to $15 in April and to above $21 per barrel by September 1999. OPEC met

again in September 1999 and agreed to maintain the production cuts through March 2000.

The production cuts combined with persistent world economic growth pushed crude oil prices

up, to above $24 in December 1999. In early January 2000, Saudi Arabia indicated OPEC’s

1

resolve to stick to the production cuts through March, in spite of declining world crude oil

and product inventories. Prices continued up, hitting $30 per barrel in January and February

2000. While lasting high crude oil prices lead to agreement to production increase in OPEC,

oil prices was not going to fall because of declines of product inventories. With fluctuations,

$30 per barrel had been maintained until US government decision to release 30 million

barrels of SPR in September 2000. Crude oil prices hit above $35 per barrel (WTI $36.92

September 20, 2000) in September 2000, compared to $10 per barrel in February 1999. It was

obviously most significant oil price increase after Iraqi invasion to Kuwait in 1990.

It has been argued that the recent oil price increases may be another oil crisis. Some assert

that the recent oil price increase in third oil shock, while others affirm that it is totally

different from the previous oil shocks. Even though there is little consensus on the oil crisis

issue, it is evident that the recent oil price increases have affected differently between

developing and developed countries. Many international organizations warned that high oil

prices would hit developing countries. IMF, in September 2000, noted that poor countries,

particularly dependent on non-oil commodity exports, have been hardest hit by the rise in

world oil costs. The United Nations said rising oil prices took a heavy toll on cash-strapped

developing countries in December 2000. On the other hand, we can little find that advanced

or developed countries have severely been hit by rising oil prices, even though their domestic

oil product prices have been skyrocketed.

In this paper, we assess the impact of oil price increase on the global economy, especially

between developing and developed countries. First, we explain impact of oil price increases

on the economy. Second, we investigate whether the impact is different between developed

and developing countries. And in the next, we attempt to explain why the impact is different

across developing and developed countries.

2. Impact of oil price increases

Oil price changes affect economic activities such as growth, inflation, trade balance, and so

on. It is generally agreed that oil price increases lead to sluggish economic growth. Many

studies have supported this theoretically and empirically since the first oil shock in the 1970s.

Actually, the oil shocks in the 1970s had significantly negative impact on the growth. Table 1

shows growth rates of the four countries around the oil shock periods of the 1970s.

2

Table 1. GDP Growth rates

1972-74 1978-80

1972 1973 1974 1978 1979 1980

US 6.1 5.9 -2.2 4.8 3.2 -0.8

Japan 9.4 10.2 -3.3 6.0 5.9 5.4

UK 3.5 5.3 -0.5 3.6 1.5 -3.0

West Germany 3.0 5.3 0.4 3.3 4.5 1.8

OECD total 5.7 6.3 0.3 3.9 3.3 1.0

Source: OECD

As seen in Table 1, GDP growth rates just after an oil price shock sharply fall down. In 1974,

OECD GDP growth is 0.3 percent, compared to 6.3 percent in 1973. Also, In 1980, GDP

growth rate of OECD is 1.0 percent, compared to 3.3 percent in 1979. This fact lets us know

the impact was significant. Some economists assert that the oil crisis caused a decline in GDP

of 4.7 percent in the US, 2.5 percent in Europe, and 7.0 percent in Japan1. And, according to

the US government, the 1979 increase in oil prices caused world GDP to drop by 3 percent

from the trend2.

Oil price increases lead to high costs of production, raising a sharp inflation. In 1974,

inflation skyrocketed, peaking at 12.4 percent in OECD. In 1980, inflation in OECD reached

to 12.9 percent. Table 2 shows inflation rates in OECD countries over the oil price hike

periods.

Table 2. Inflation in OECD countries over the oil price hikes

1972-74 1978-80

1972 1973 1974 1978 1979 1980

US 3.2 5.6 10.2 7.5 11.3 13.5

Japan 4.7 12.0 26.0 3.8 3.6 8.0

UK 7.7 7.3 11.0 8.2 13.4 18.0

W. Germany 5.9 5.8 6.5 2.7 4.1 5.5

OECD 5.0 7.5 12.3 7.9 9.9 12.9

Source: OECD.

1 Edward R. Fried and Charles L. Schultze, Higher Oil Prices and the World Economy: The Adjustment Problem, The Brookings Institution, 1975.2 Council of Economic Advisers, Economic Report of the President, US Government Printing Office, 1981.

3

Then we can ask whether all the oil price increases affect economic activities seriously. We

know all the oil price increases do not cause economic turmoil. Some conditions for oil price

hikes are needed to cause economic recessions. The 1973 and 1979 crises shared three key

characteristics. First, the disruption in oil supplies occurred at a time when the world

economy was expanding at a rapid rate. The rapid economic growth stimulated greater use of

petroleum. Second, both disruptions occurred when the world’s crude oil capacity was being

stretched to the limit. Third, each crisis took place at a time when investment in oil and gas

exploration had tapered off, making it impossible to achieve a speedy increase in non-OPEC

output3.

We can ask to ourselves if the recent oil price hikes may satisfy the above three conditions.

First, the recent oil price hikes took place at a time when the global economy was expanding

rapidly. We know that developed countries like US experienced booms and developing

countries such as Korea, Malaysia, Indonesia, Taiwan, and Thailand rapidly overcame

economic turmoil due to the financial crisis of 1997. This economic expansion started to

increase petroleum use.

Table 3. GDP and oil consumption growth rates

1997 1998 1999 2000

GDP growth 4.1 2.5 3.3 4.7

Oil

consumption

growth

World

OECD

Non-OECD

2.4

1.0

4.3

0.7

1.2

0.0

1.6

1.2

1.9

1.3

0.0

3.4

Source: World Economic Outlook, IMF. Short-Term Energy Outlook, EIA.

Second, in Table 4, we can see OPEC’s production and capacity use. In capacity use, OPEC

is expected to use around 90 percent of their capacity for production. The capacity use will be

very high relative to previous capacity. The high capacity use might be caused by lack of new

investment in production capacity of OPEC in a last decade.

3 Philip K. Verleger, Third Oil Shock: Real or Imaginary? Consequences and Policy Alternatives, International Economics Policy Briefs, #00-4, Institute for International Economics, 2000.

4

Table 4. Estimates of OPEC productive capacity and capacity use

Capacity(1000bd) Output(1q 2001) Capacity use(%)

Algeria

Indonesia

Iran

Kuwait

Libya

Nigeria

Qatar

Saudi Arabia

UAE

Venezuela

OPEC 10

Iraq

Total

900

1,350

3,800

2,200

1,450

2,300

750

10,500

2,500

3,050

28,900

3,100

32,000

827

1260

3744

2151

1430

2124

710

8498

2271

2954

25,970

2,221

28,191

91.9

93.3

98.5

97.8

98.6

92.3

94.7

80.9

90.8

96.9

89.9

71.6

88.1

Source: EIA

3. Different Impact between Developed and Developing Countries?

It is generally agreed that the recent oil price increases affect the global economy severely.

Here, we present IMF’s study4 on the impact of oil price increases on global economy.

Particularly, we assess the differential impacts across developing and developed countries.

The impact of an oil price increase of $5 per barrel on the global economy (IMF)

- Higher oil prices affect the global economy through a variety of channels

In the case of oil price increases, there will be a transfer of income from oil consumers to oil

producers. On an international level, the transfer is from oil importing countries to oil

exporters, and oil exporters tend to expand demand only gradually. It will affect income

redistribution of the global economy.

Also, when oil prices increase and energy input prices rise, there will be a rise in the

production costs in the economy, depending on degree of competition of the markets. As the

oil intensity of production in developed countries has fallen over the past three decades, the

cost side impact of increases in oil prices can be expected to be less than in past oil price

4 IMF, The impact of higher oil prices on global economy, 2000.

5

increases. In developing countries, however, where the oil intensity of production has

declined less, the impact may be closer to that in the earlier period.

There will be a demand side impact of oil price increases. When oil prices rise, consumers are

likely to delay or postpone their purchasing durables such as automobiles. This demand side

impact leads to relative increase in inventories to sales and then decline industrial production.

Finally, depending on expected duration of price increases, the change in relative prices

creates incentives for suppliers of energy to increase production and investment, and for oil

consumers to economize.

- The impact on Industrial Countries

For the developed industrial countries, real GDP falls 0.3 percentage points below the

baseline in 2001 and 2002. Headline CPI inflation rises in all countries in the short run, with

particularly large impact in the US and euro area. The financial impact of the increase in oil

prices is smoothed out. Exchange rates relatively stable. Lower expected future profits result

in a fall of 1-2 percent in equity prices in the developed countries.

Interestingly, the cost-side impact is large in the US, as it has a higher energy intensity of

production than other developed countries. The higher the fuel tax wedge, the smaller the

proportional impact on retail prices of a given rise in oil prices. The US has the smallest

wedge and hence the biggest impact. The inflationary consequences and monetary policy

response are most significant in the US and euro area, reflecting a combination of relatively

high energy consumption, inertia in the inflation process, and differences in resistance to real

income losses.

- The impact on developing and transition Economies

The impact on developing countries seems to be at least as large as for many of the industrial

countries. Oil exporting countries suffered seriously from the oil price decline in 1997-98 are

expected to benefit substantially with recent oil price increases. On the other hand, there is a

negative impact on oil importing countries, especially as dependency on oil has not fallen to

the same extents as in industrial countries. Oil price increases affect developing countries

very differently. Oil exporting countries such as UAE have a large current account surplus

while many oil importing countries are expected to be adversely affected. The oil price

increase would add to its current account deficit by 1.25 percent. A number of countries also

face additional pressures from weak non-oil commodity prices, and have limited access to

6

capital markets, which will further increase the adverse impact on domestic absorption.

In major emerging market economies, the results vary widely by region, depending on the

relative size of oil importing to exporting countries. Asia experiences the largest negative

impact on growth. Latin America, emerging Europe and Africa are less adversely affected by

the oil shock. Among the oil importing countries, the largest impact on GDP growth and the

balance of payments is expected to be in India, Korea, Pakistan, Philippines, Thailand, and

Turkey. The oil price increases will affect China’s economic recovery, yet the direct impact of

oil price hikes on China’s economy should be much less than that on most Asia-Pacific

countries as the ratio of net oil imports to domestic oil consumption is much lower than the

Asian average. The ratio for China is 22 percent, but 100.2 percent for Japan and 61.4 percent

for the rest of Asia Pacific. Also, oil occupies only 26.6 percent in China’s primary energy

consumption, much lower than other Asian countries, which are heavily dependent on oil.

While the Heavily Indebted Poor Countries (HIPC countries) and transition economies

account for small share of global GDP, many of them are among the most seriously affected

by higher oil prices. Indeed, 30 of the 40 HIPC countries, and a majority of the

Commonwealth of Independent States (CIS) countries are net oil importers. Most of these

countries have very low per capita incomes, high level of oil imports relative to GDP, large

current account deficits, high external debt, and very limited access to global capital markets.

The impact of higher oil prices on growth and activity in oil producing countries will depend

on a variety of factors, most importantly how these windfall oil revenues are spent. In many

oil exporting countries, a significant proportion of higher oil revenues will accrue to the

government. The reaction of the government is likely to depend on the underlying financial

situation of the country. Saudi Arabia, which has traditionally been a net creditor, may choose

to replenish reserves. The authorities may also decide to use some of the additional revenue to

ease spending restraints adopted as oil prices declined. For other oil exporters that have in the

past been net debtors, such as Mexico and Venezuela, a rise in oil prices would not only

increase export earnings but could also lower external borrowing costs, assuming the higher

oil prices would reduce the risk premia charged these countries as their future export earnings

rose.

Table 5. Permanent $5 per barrel increase in the price of oil

2000 2001 2002 2003 2004

7

World GDP

Industrial Countries

Real GDP

Real Domestic Demand

Trade balance ($ billion)

US

Real GDP

Real Domestic Demand

CPI Inflation

Trade Balance ($ billion)

Euro Area

Real GDP

Real Domestic Demand

CPI Inflation

Trade Balance ($ billion)

Japan

Real GDP

Real Domestic Demand

CPI Inflation

Trade Balance ($ billion)

Developing Countries

Real GDP

Domestic Demand

Trade Balance ($ billion)

-0.2

-0.2

-0.2

-26.7

-0.3

-0.3

0.8

-12.2

-0.2

-0.3

0.7

-10.8

-0.1

-0.2

0.3

-10.5

-0.1

26.1

-0.3

-0.3

-0.4

-20.3

-0.4

-0.5

0.5

-9.1

-0.4

-0.5

0.5

-7.8

-0.2

-0.3

0.2

-8.5

-0.2

20.3

-0.3

-0.3

-0.4

-22.4

-0.4

-0.4

0.3

-10.5

-0.4

-0.6

0.4

-6.2

-0.3

-0.4

0.1

-6.5

-0.2

-0.1

22.4

-0.2

-0.2

-0.2

-24.6

-0.2

-0.3

0.2

-12.5

-0.2

-0.5

0.3

-5.2

-0.2

-0.3

0.1

-5.3

-0.2

-0.1

24.6

-0.1

-0.1

-0.1

-24.7

-0.1

-0.2

0.1

-7.3

-0.1

-0.3

0.1

-4.7

-0.1

-0.2

-4.4

-0.2

-0.1

24.7

Source: IMF.

Table 6. Emerging Markets: Estimated Effects after 1 year of a $5 Oil Price Hike

Real GDP Inflation Current Account

(percent of GDP)

Latin America -0.1 0.6 0.0

8

Argentina

Brazil

Chile

Mexico

Asia

China

India

Indonesia

Korea

Malaysia

Philippines

Thailand

Emerging Europe and

Africa

Pakistan

Poland

Russia

South Africa

Turkey

-0.2

-0.2

-0.2

0.0

-0.4

-0.4

-0.5

0.1

-0.9

-0.2

-0.8

-0.9

0.1

-0.5

-0.3

0.7

-0.4

-0.2

0.1

1.0

1.0

0.1

0.7

0.4

1.3

1.0

0.8

1.0

0.8

0.4

0.3

0.4

0.0

0.0

1.2

-

0.1

-0.2

-0.7

0.2

-0.5

-0.3

-0.6

0.6

-1.0

0.0

-1.0

-1.5

0.2

-1.0

-0.4

1.8

-0.9

-0.3

Source: IMF (2000)

Table 7. Current Account Effects for a Sample of Developing Countries from $10 Increase in

Oil Prices (as percent GDP)

Oil Importers Oil Exporters All Developing

East Asia and Pacific

South Asia

Latin America

Sub-Saharan Africa

Europe and Central Asia

Middle East and North Africa

Total Developing Countries

HIPC

-1.0

-0.9

-0.7

-0.7

-1.7

-1.1

-1.1

-1.4

2.0

0.0

2.0

19.5

10.3

11.4

5.7

19.0

-0.7

-0.9

0.8

3.2

1.5

8.6

1.5

1.7

9

Source: World Bank (2000)

The impact of the recent oil price increase on developed countries has been less than the impact

of price rises during the oil price shocks of 1973-74 and 1979-80, because output is much less

dependent on oil than before. Nevertheless, the oil price rise has increased inflationary pressures

and trade deficits in some of the industrial countries, as well as exacerbating tensions over the

level of gasoline taxes. Oil-importing developing countries have been more severely affected

than industrial countries, because they consume more energy for a given output and have less

access to the external financing required to meet expenditure levels.

The United Nations said rising oil prices took a heavy toll on cash-strapped developing

countries. The total bill for oil imports by the world’s 133 developing countries excluding China

rose from 100 billion dollars in 1999 to about 160 billion dollars in 2000. The hefty 60-billion

dollar increase was the equivalent of about 1.3 percent of GDP of the world’s poorer nations.

The oil-importing emerging market economies should be able to smooth the impact of the shock

with private finance, through some with already large current deficits will have to proceed with

caution. Oil-importing developing countries without access to private capital markets will face

an additional official financing need of about $18 billion. Since countries will be undertaking

some degree of adjustment, and the need for official aid flows to oil exporters may be much less

for a time, the net additional call on international donors does not appear insurmountable.

Table 8. Growth of World GDP, 1998-2002

1998 1999 2000 2001 2002

World total

High-income countries

OECD

US

Japan

Euro Area

Non-OECD countries

Developing countries

East Asia and Pacific

1.9

2.1

2.1

4.4

-2.5

2.7

0.7

1.0

-1.4

2.8

2.7

2.7

4.2

0.3

2.4

4.2

3.2

6.9

4.1

3.8

3.7

5.1

2.0

3.4

6.3

5.3

7.2

3.4

3.0

2.9

3.2

2.1

3.2

5.1

5.0

6.4

3.2

2.8

2.7

2.9

2.2

2.8

5.1

4.8

6.0

10

Europe and Central Asia (ECA)

Latin America and the Caribbean

Middle East and North Africa

Sub-Saharan Africa

East Asia-5 countries*

Transition countries of ECA

Developing countries

Excluding the transition countries

Excluding China and India

0.0

2.0

3.3

5.6

2.0

-8.2

-0.7

1.2

-0.6

1.0

0.1

2.2

5.7

2.1

6.7

2.5

3.3

2.2

5.2

4.0

3.1

6.0

2.7

6.9

5.0

5.3

4.7

4.3

4.1

3.8

5.5

3.4

5.5

4.2

5.1

4.4

3.9

4.3

3.6

5.5

3.7

5.1

3.7

5.0

4.5

* Indonesia, the Republic of Korea, Malaysia, the Philippines, and Thailand.

Source: The World Bank (2000)

4. Why different?

Why does the recent oil price increase affect less developed than developing countries? There

are some explanations.

Energy intensity

Comparison of energy intensity between developed and developing countries gives an

explanation of the different impacts between developing and developed countries. Energy and

oil intensity5 are shown in Figure 1 (OECD vs. Non-OECD). Oil intensity in the OECD area has

halved. In OECD countries, a real income loss in 2000 is likely to be 0.5 percent of GDP; 2.75

percent in 1974; 2.5 percent in 1979-80.

Figure 1. Comparison of energy intensity

5 Ignazio Visco, “Trade and growth prospects in the OECD Countries,” 15th IEA State of the Economy Conference, London, 5 December, 2000.

11

source: OECD, Economic Outlook, no 68, Dec 2000

Technological innovations in energy efficiency may lower energy intensity. Moreover, the

innovations help developed countries have more energy efficiency than developing countries. In

1981, jet fuel accounted for 29.7% of airlines’ operating expenses, says the Air Transport

Association. With new energy-saving technologies, such as two-engine planes with the same

kick as the old three-engine versions, fuel now represents only 10% of the industry’s costs. The

sport-utility vehicle craze has put more gas-hungry cars on the highways. But computer-

controlled fuel injection and new transmission technologies have raised the overall efficiency of

the nation’s auto fleet by about 5% since 1990. The averaged American car was driven about

2,000 more miles last year than in 1973, but it used about 200 gallons less gasoline, the

Transportation Department says.

Table 9. Energy Efficiency

GDP per unit of energy use

(PPP $ per kg oil equivalent)

1980 1997

Algeria

Iran

Saudi Arabia

Argentina

Brazil

Mexico

Bulgaria

4.7

2.7

2.8

4.3

4.4

2.9

5.3

3.0

2.1

6.9

6.5

5.1

12

Hungary

Poland

Ghana

Kenya

South Africa

China

India

Indonesia

Korea

Malaysia

Thailand

Bangladesh

Pakistan

Australia

Canada

US

Japan

Denmark

France

Italy

Netherlands

UK

0.8

1.9

1.0

2.7

1.0

2.5

0.7

1.8

2.0

2.5

3.2

2.9

2.9

2.0

2.0

1.4

1.6

3.0

2.5

2.7

3.7

2.1

2.4

1.9

4.0

2.7

4.5

2.0

3.3

3.3

4.2

4.5

3.9

4.0

4.7

6.8

3.9

4.0

3.0

3.6

6.0

6.0

5.0

7.3

4.6

5.3

“New” economy

The “New” economy will be another explanation. The “New” economy is characterized in high

economic growth and low growth in energy use. A reason may be the rise of the IT-producing

sector, which features less energy-intensive industries, such as computer manufacturing and

software as opposed to the more energy-intensive industries, such as chemical manufacturing, or

iron and steel production. IT industries are estimated to have contributed nearly a third of real

13

U.S. economic growth between 1995 and 19996.

For instance, fuel-gulping manufacturers in US accounted for only 17% of the economy in

1997, down from 22% in 1977. U.S. oil expenditures have fallen to an estimated 3% of gross

domestic product from a high of 8.5% in 1981, according to the U.S. Energy Information

Administration. Suggesting that the growth of the Internet and the service sector has produced

lasting changes in the economy, the U.S. in 1997 and 1998 posted its sharpest energy-efficiency

gains in a decade, according to an analysis by the nonprofit Center for Energy and Climate

Solutions. In both years, energy consumed per dollar of GDP fell by 4%, compared with the

previous decade’s average decline of less than 1% a year.

Competition

In their paper, Rotemberg and Woodford (1996) argue that imperfect competition strengthens

rise in prices relative to wages and that the model allowing imperfect competition better

explains the effect of oil price increases on economy than that with perfect competition. It

implies that imperfect competition plays a role in magnifying inflation.

In today’s developed countries with competitive markets, companies cannot afford to pass on

the higher fuel costs to their customers for fear of disastrous drops in business. Therefore, the oil

price hit looks likely to be taken more in the form of lower company profit margins and less in

generally higher prices. However, in imperfect competitive markets, firms can easily pass higher

fuel costs to their customers by maintaining their mark-ups.

This implies that the countries with more competitive markets may have lower inflation than

those with less competitive markets.

Oil to natural gas

Most outstanding change in energy consumption structure during last three decades is fuel

substitution of natural gas for oil. After oil crises of the 1970s, many countries tried to reduce oil

consumption and replace oil with other energy sources such as gas and nuclear. Especially,

substitution of gas for oil is a world-wide fact during last two decades.

The composition in sources of electricity in table 8 shows the oil-to-gas feature. This oil-to-gas

change is prominent in the developing countries. In low & middle income countries’ electricity

sources, oil share falls down from 49.3 percent to 12.6 percent, while gas share rises from 4.2

6 U.S. Department of Commerce, The Digital Economy 2000, http://www.ecommerce.gov, June 2000, p. viii.

14

percent to 18.2 percent. In high-income countries, oil share goes down from 17.7 percent to 6.9

percent, while gas share slightly rises from 11.3 percent to 13.8 percent.

The fuel shifting oil to gas is also distinguished in end-use sectors. The switching oil-and-gas

technology development contributes increase in gas consumption. For example, LTV Corp, the

Cleveland steel-maker is responding to the more than doubling of petroleum prices by flicking a

switch. Using technology it installed over the past decade, it is shifting the fuel that fires its

blast furnaces and boilers to natural gas from oil. Computer modeling lets LTV know when it ’s

time to make the change.

Although oil-to-gas shift has been progressed in the developing countries since 1980, the

developing countries are still more dependent on oil than developed countries. In sources for

electricity production of 1997, oil share in middle income countries was 14.6 percent compared

with 6.9 percent in high-income countries. Developing countries use more of the world’s oil

output than they did at the time of the last oil crisis. They use nearly 40 percent of world oil,

compared with 26 percent in the 1970s. Many developed countries have sought to diversify their

energy sources since then. The growth in the use of oil in developing countries has averaged 5

percent per year since 1970, compared with 1 percent per year growth in developed countries.

This increased dependence means that China’s oil import bill could jump 250 percent in 2000

while the Brazilian import bill could be 150 percent higher as a result in the rise in oil prices.

Part of the reason that developing countries are hit harder is that they are more reliant on their

energy intensive manufacturing sectors.

Table 10. Sources of Electricity, 1980-1997 (%)

Hydro Coal Oil Gas Nuclear

1980 1997 1980 1997 1980 1997 1980 1997 1980 1997

Low Income

Excluding China & India

Middle Income

Lower Middle Income

Upper Middle Income

Low & Middle Income

East Asia & Pacific

29.7 20.3

46.0 39.5

20.3 24.3

15.2 18.8

32.8 31.7

22.3 22.9

17.2 14.1

41.5 63.8

1.5 9.9

15.1 24.4

9.0 24.3

30.2 24.7

20.6 38.3

45.3 59.3

25.8 8.8

43.7 24.5

55.5 14.6

67.8 12.3

25.4 17.7

49.3 12.6

35.9 11.6

1.8 5.6

5.8 24.3

4.8 25.1

3.0 32.0

9.3 15.9

4.2 18.2

0.3 8.9

1.3 1.4

3.0 0.6

3.8 10.5

4.7 11.6

1.6 9.0

3.3 7.3

0.9 5.4

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Europe & Central Asia (ECA)

Latin America & the Caribbean

Middle East & North Africa

South Asia

Sub-Saharan Africa

High Income

Europe EMU

13.5 17.2

59.9 63.1

20.5 8.4

41.5 18.7

24.0 16.5

19.5 15.1

17.0 12.0

13.6 29.6

2.1 4.6

1.0 1.5

43.0 62.7

70.8 73.3

39.6 38.4

37.2 27.3

65.4 6.2

24.1 17.5

52.2 47.6

7.4 7.0

4.4 3.3

17.7 6.9

22.9 8.8

2.2 31.2

11.5 10.0

26.3 42.5

5.9 9.7

0.8 2.2

11.3 13.8

10.0 11.9

5.1 15.3

0.6 2.5

2.2 1.9

. 4.7

11.5 23.8

11.9 38.0

Source: The World Bank (2000)

4. Concluding Remarks

Developing countries’ limitation in impact mitigation

All the countries, oil producers and consumers, want stable oil prices. If oil prices continue to be

high, consumers attempt to employ some measures to reduce their oil consumption and

substitute other fuels for oil. This leads to oil demand decrease in consumer countries and

unexpected revenue decline for oil producer countries.

Volatile oil prices negatively affect both producers and consumers. Consumer countries,

especially oil importing countries, should be prepared to cope with oil price volatility. Oil

importing consumer countries have used some policy measures. Most general but costly

measure against volatile oil prices is to have strategic oil stock. Another demand side measure

is to improve energy efficiency through using more advanced technology. These measures have

been employed in developed countries, while the measures have been little used in developing

countries. It is mainly because developing countries have difficulties in financial access and

technological limitation.

Developed countries’ financial support and technological transfer will afford mitigation of oil

price increase impacts to developing countries. Also, developed and developing countries need

to find new measures to alleviate the impacts of oil price increases. Sharing stockpile will be a

measure.

Oil to gas

During the last three decades, oil-to-gas was a remarkable fuel shifting. In fact, this shift

lessened the oil price impacts on global economy. However, the oil-to-gas shift results from

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implementing measures for environmental enhancement as well as for oil price impact

mitigation. Currently extensive efforts for reducing CO2 emissions are on the move. Oil

consumption will be the one that should not be used for environmental improvement. In this

sense, alternative fuels for reducing CO2 emissions will be a hope. Such emission free fuels

need extensive technological development. Since developing countries with lack of financial

and technological accessibility are not able to develop alternative fuels, they cannot but depend

on fuel switching such as oil-to-gas.

Extensive pipeline network construction is a precondition for natural gas use. Financial

affordability needs to build network construction. In natural gas uses, lack of financial

accessibility is an important restriction to developing countries. In this reason, it will bring into

an issue of energy cooperation between natural gas producers and consumers or developing and

developed countries. Regional integration in energy network between developing and developed

countries will be a main topic in this century’s energy.

References

Ignazio Visco (2000), “Trade and growth prospects in the OECD countries,” 15th IEA State of

the Economy Conference, London.

IMF (2000), The impact of higher oil prices on global economy.

PRICEWATERHOUSECOOPERS (2000), UK Economic Oulook.

Rotemberg, J.J. and M. Woodford (1996), “Imperfect Competition and the Effects of Energy

Price Increases on Economic Activity,” Journal of Money, Credit, and Banking, Vol. 28,

No. 4 Part 1, pp.549-77.

United Nations (2000), World Economic Situation and Prospects 2001.

The World Bank (2000), Prospects for Developing Countries and World Trade, unpublished

proofs.

The World Bank (2000), World Development Indicators.

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