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.

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 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 Japan 1. 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.

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 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 2.4 0.7 1.6 1.3
OECD 1.0 1.2 1.2 0.0
Non-OECD 4.3 0.0 1.9 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 900 827 91.9
Indonesia 1,350 1260 93.3
Iran 3,800 3744 98.5
Kuwait 2,200 2151 97.8
Libya 1,450 1430 98.6
Nigeria 2,300 2124 92.3
Qatar 750 710 94.7
Saudi Arabia 10,500 8498 80.9
UAE 2,500 2271 90.8
Venezuela 3,050 2954 96.9
OPEC 10 28,900 25,970 89.9

Iraq 3,100 2,221 71.6

Total 32,000 28,191 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

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 World GDP -0.2 -0.3 -0.3 -0.2 -0.1

Industrial Countries
Real GDP -0.2 -0.3 -0.3 -0.2 -0.1
Real Domestic Demand -0.2 -0.4 -0.4 -0.2 -0.1
Trade balance ($ billion) -26.7 -20.3 -22.4 -24.6 -24.7

US
Real GDP -0.3 -0.4 -0.4 -0.2 -0.1
Real Domestic Demand -0.3 -0.5 -0.4 -0.3 -0.2
CPI Inflation 0.8 0.5 0.3 0.2 0.1
Trade Balance ($ billion) -12.2 -9.1 -10.5 -12.5 -7.3

Euro Area
Real GDP -0.2 -0.4 -0.4 -0.2 -0.1
Real Domestic Demand -0.3 -0.5 -0.6 -0.5 -0.3
CPI Inflation 0.7 0.5 0.4 0.3 0.1
Trade Balance ($ billion) -10.8 -7.8 -6.2 -5.2 -4.7

Japan
Real GDP -0.1 -0.2 -0.3 -0.2 -0.1
Real Domestic Demand -0.2 -0.3 -0.4 -0.3 -0.2
CPI Inflation 0.3 0.2 0.1 0.1
Trade Balance ($ billion) -10.5 -8.5 -6.5 -5.3 -4.4

Developing Countries
Real GDP -0.1 -0.2 -0.2 -0.2 -0.2
Domestic Demand -0.1 -0.1 -0.1
Trade Balance ($ billion) 26.1 20.3 22.4 24.6 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

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 Argentina -0.2 0.1 0.1
Brazil -0.2 1.0 -0.2
Chile -0.2 1.0 -0.7
Mexico 0.0 0.1 0.2

Asia -0.4 0.7 -0.5

China -0.4 0.4 -0.3
India -0.5 1.3 -0.6
Indonesia 0.1 1.0 0.6
Korea -0.9 0.8 -1.0
Malaysia -0.2 1.0 0.0
Philippines -0.8 0.8 -1.0
Thailand -0.9 0.4 -1.5

Emerging Europe and 0.1 0.3 0.2

Africa
Pakistan -0.5 0.4 -1.0
Poland -0.3 0.0 -0.4
Russia 0.7 0.0 1.8
South Africa -0.4 1.2 -0.9
Turkey -0.2 - -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 -1.0 2.0 -0.7
South Asia -0.9 0.0 -0.9
Latin America -0.7 2.0 0.8
Sub-Saharan Africa -0.7 19.5 3.2
Europe and Central Asia -1.7 10.3 1.5
Middle East and North Africa -1.1 11.4 8.6
Total Developing Countries -1.1 5.7 1.5
HIPC -1.4 19.0 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 1.9 2.8 4.1 3.4 3.2

High-income countries 2.1 2.7 3.8 3.0 2.8

OECD 2.1 2.7 3.7 2.9 2.7
US 4.4 4.2 5.1 3.2 2.9
Japan -2.5 0.3 2.0 2.1 2.2
Euro Area 2.7 2.4 3.4 3.2 2.8
Non-OECD countries 0.7 4.2 6.3 5.1 5.1

Developing countries 1.0 3.2 5.3 5.0 4.8

East Asia and Pacific -1.4 6.9 7.2 6.4 6.0

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 Europe and Central Asia (ECA) 0.0 1.0 5.2 4.3 3.9
Latin America and the Caribbean 2.0 0.1 4.0 4.1 4.3
Middle East and North Africa 3.3 2.2 3.1 3.8 3.6
Sub-Saharan Africa 5.6 5.7 6.0 5.5 5.5
2.0 2.1 2.7 3.4 3.7

East Asia-5 countries* -8.2 6.7 6.9 5.5 5.1

Transition countries of ECA -0.7 2.5 5.0 4.2 3.7
Developing countries
Excluding the transition countries 1.2 3.3 5.3 5.1 5.0
Excluding China and India -0.6 2.2 4.7 4.4 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 4.7 5.3
Iran 2.7 3.0
Saudi Arabia 2.8 2.1

Argentina 4.3 6.9

Brazil 4.4 6.5
Mexico 2.9 5.1

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 Bulgaria 0.8 1.9
Hungary 1.9 4.0
Poland 1.0 2.7

Ghana 2.7 4.5

Kenya 1.0 2.0
South Africa 2.5 3.3

China 0.7 3.3

India 1.8 4.2
Indonesia 2.0 4.5
Korea 2.5 3.9
Malaysia 3.2 4.0
Thailand 2.9 4.7
Bangladesh 2.9 6.8
Pakistan 2.0 3.9

Australia 2.0 4.0

Canada 1.4 3.0
US 1.6 3.6
Japan 3.0 6.0

Denmark 2.5 6.0

France 2.7 5.0
Italy 3.7 7.3
Netherlands 2.1 4.6
UK 2.4 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 29.7 20.3 41.5 63.8 25.8 8.8 1.8 5.6 1.3 1.4

Excluding China & India 46.0 39.5 1.5 9.9 43.7 24.5 5.8 24.3 3.0 0.6

Middle Income 20.3 24.3 15.1 24.4 55.5 14.6 4.8 25.1 3.8 10.5

Lower Middle Income 15.2 18.8 9.0 24.3 67.8 12.3 3.0 32.0 4.7 11.6

Upper Middle Income 32.8 31.7 30.2 24.7 25.4 17.7 9.3 15.9 1.6 9.0

Low & Middle Income 22.3 22.9 20.6 38.3 49.3 12.6 4.2 18.2 3.3 7.3

East Asia & Pacific 17.2 14.1 45.3 59.3 35.9 11.6 0.3 8.9 0.9 5.4

15
 Europe & Central Asia (ECA) 13.5 17.2 13.6 29.6 65.4 6.2 2.2 31.2 5.1 15.3

Latin America & the Caribbean 59.9 63.1 2.1 4.6 24.1 17.5 11.5 10.0 0.6 2.5

Middle East & North Africa 20.5 8.4 1.0 1.5 52.2 47.6 26.3 42.5

South Asia 41.5 18.7 43.0 62.7 7.4 7.0 5.9 9.7 2.2 1.9

Sub-Saharan Africa 24.0 16.5 70.8 73.3 4.4 3.3 0.8 2.2 . 4.7

High Income 19.5 15.1 39.6 38.4 17.7 6.9 11.3 13.8 11.5 23.8

Europe EMU 17.0 12.0 37.2 27.3 22.9 8.8 10.0 11.9 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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