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IMF warns on risk of ‘permanent oil shock’

Financial Times | April 7, 2005
By Javier Blas

The world faces “a permanent oil shock” and will have to adjust to sustained high prices in the next two decades, the International Monetary Fund said on Thursday in the starkest official warning yet about the long-term outlook for energy supplies.

Predicting surging demand from emerging countries and limited new supplies from outside the Organisation of the Petroleum Exporting Countries after 2010, Raghuram Rajan, IMF chief economist, said: “We should expect to live with high oil prices.”

“Oil prices will continue to present a serious risk to the global economy,” he added.

The IMF forecast in its World Economic Outlook that crude would cost $34 a barrel in 2010 in today's money and would rise to $39-$56 a barrel in 2030. The predicted prices are well above market and oil industry expectations. They are also much higher than the latest long-term forecast from the International Energy Agency, the oil watchdog, of real oil prices of $27 a barrel in 2010 and $34 a barrel in 2030.

“The shock we see is a permanent shock that is going to continue... and countries need to adjust to that,” said David Robinson, deputy IMF chief economist.

Opec will need to increase production further to balance the oil market in the second half of the year, the US government said.

The IMF called on emerging countries in Asia, which this year would account for 40 per cent of the increase in oil demand, to curb their fuel subsidies. Several countries in the region, including China, Indonesia and Malaysia, have recently increased petrol prices in an attempt to reduce consumption.

The IMF based its forecast on a sharp rise in global oil demand, particularly from increased vehicle ownership in China, and non-Opec production reaching a plateau around 2010.

It expects oil demand to grow at a yearly rate of 2.1m barrels a day above the 1.5m b/d the market considers sustainable to reach 138.5m b/d in 2030.

Some analysts are sceptical about the IMF's demand and projections, pointing out that no other international energy body shares its view.

But the IMF's report paints a gloomy picture for energy consumers: “With global dependence on oil production from Opec countries rising, much would depend on Opec supply response; most likely however, there would be growing upside risk to prices.” It estimates that the cartel, which controls 40 per cent of global oil production, would need to invest about $350bn to 2030 in new installations.

The IMF warning came as the US Department of Energy on Thursday raised its oil price forecast in 2005 and 2006 to about $55 a barrel, up more than $6 from last month.

US crude futures were flat in late afternoon trade on Thursday at $55 a barrel.

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