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Figure 1 shows production of crude oil. Other commonly used aggregates also include natural gas liquids and other liquids.
The paper represents a further development of the analysis contained in chapter 3 of the April 2011 IMF World Economic Outlook (Helbling and others (2011)).
In the econmics literature a “shock” is a sudden and unanticipated change in one of the economy’s driving forces, in this case the growth rate of world oil supply.
As we will discuss, existing technologies may permit significant substitution away from oil towards gas and coal once oil prices reach very high levels. This may well delay the moment at which oil supply problems start to have serious effects, but probably by years rather than decades.
Other studies by official U.S. agencies that have warned about this issue include United States Government Accountability Office (2007) and United States Joint Forces Command (2010).
In economic jargon, oil is an endowment.
Spare capacity is the amount of oil that producers could technically bring to market immediately if prices (and politics) justified it. The evidence shows that when officially reported spare capacity drops below 2 million barrels per day, oil prices start to increase sharply. In other words at that level, which was reached both in 2008 and recently, the price elasticity of oil production drops sharply.
EROEI is the ratio of the useful energy provided by a given energy source to the energy needed to produce it. There are significant measurement issues, because it is not trivial to compute useful energy, and because narrow or broad measures of energy used in production can be used. Hall and others (2009) claim that a society needs to operate with an overall EROEI of at least 3 to be sustainable, as otherwise a huge share of economic activity would need to be devoted exclusively to energy production. U.S. oil production currently exhibits an EROEI of around 20, while most renewables are below 3, with some approaching 1, where production obviously becomes completely pointless.
Oil, coal and natural gas currently account for about 33, 28 and 23 percent, respectively, of primary energy consumption in the world (U.S. Energy Information Agency (2009)).
The practice of double-counting new resources for a variety of substitutions is unfortunately rampant in parts of the literature.
Gas filling stations require significantly greater safety precautions than conventional filling stations.
This is why coal-to-liquids or gas-to-liquids industries have not yet been established on a significant scale, except in countries that have faced economic sanctions or economic isolation.
Oil exporters include the following countries: Algeria, Angola, Azerbaijan, Bahrain, Canada, Republic of Congo, Equatorial Guinea, Iraq, Kuwait, Libya, Mexico, Nigeria, Norway, Oman, Qatar, Russia, Saudi Arabia, United Arab Emirates and Venezuela.
For technical reasons it is not possible to simulate a completely permanent shock to this growth rate.
Regional differences in the size of the long-term output effects reflect differences in the shares of oil in production and consumption.
In numerical linearization we first divide the size of the shock by a certain factor, then we perform the nonlinear model simulation for this smaller shock, and finally we multiply the simulation result by the same factor.
Of course this effect is only present in the manufacturing sector where oil is used as an intermediate input, and not in the consumption sector where oil is part of the consumption bundle. Note that this is different from the entropy boundary, which is present in all three sectors.