The world isn’t going to run out of oil anytime soon. But there’s still concern among various geologists and analysts that our oil supply won’t grow as quickly or as easily as it used to. We’ll have to resort to harder-to-drill oil to satisfy our crude habits. More expensive oil. That would push prices up. And high oil prices could act as a drag on growth.
This, at any rate, is the basic idea behind “peak oil.” And there’s some reason for worry. Between 1981 and 2005, world oil production grew at a steady pace of about 1.8 percent per year. All was well. But starting around 2005, oil production appeared to plateau. And, since demand for oil kept rising, especially in countries like China and India, that caused prices to soar. Oil doesn’t get much cheaper than $100 per barrel these days. And that, some economists worry, has acted as a drag on growth around the world.
So how bad would it be if peak oil was really upon us? That’s a question that two IMF economists try to tackle in a new working paper, “Oil and the World Economy: Some Possible Futures.” (pdf) The authors, Michael Kumhof and Dirk Muir, don’t make any definitive predictions about how the oil supply will evolve. Rather, they try to model a number of different scenarios in which oil does become more scarce and the world tries to adapt.