Economics, 3rd Edition

Th Eff

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FIGURE 4.16

Price of

wheat (

€)

Quantity of wheat

bought and sold

(tonnes) 

D

1

S

1

S

1

D

2

200

0

2,000  3,000 

100

The Future Price of Oil and Elasticity

At the time of writing the price of oil on world markets is hovering around 

$100 a barrel. 

The future price of oil will be dependent on a number of factors, but the concept of elasticity 

will have some relevance to all the questions which follow this article.

IMF Study: Peak Oil could 

do Serious Damage to the 

Global Economy

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. 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 produc-

tion grew at a steady pace of about 

1.8  per cent per year. All was well. 

But starting around 2005, oil produc-

tion 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 econom-

ists 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 International Monetry Fund 

(IMF) economists try to tackle in a 

new working paper, ‘Oil and the World 

Economy: Some Possible Futures’. 

The authors, Michael Kumhof and 

IN THE NEWS

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98  PART 2  SUPPLY AND DEMAND: HOW MARKETS WORK

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 scarcer and 

the world tries to adapt.

The paper itself offers an 

interesting look at how the world 

might cope with higher oil prices, 

so let’s take a look at the various 

scenarios: