The following post is a part of a series that discusses 'managing risk for development,' the theme of the World Bank’s upcoming World Development Report 2014.
Crude oil is arguably one of the single most important driving forces of the global economy, and changes in the price of oil have significant effects on economic growth and welfare around the world. Indeed, the level of oil dependency of industrialized economies became particularly clear in the 1970s and 1980s, when a series of political incidents in the Middle East disrupted the security of supply and had severe effects on the global price of oil. Since then, oil price shocks due to such exogenous events have continuously increased in size and frequency (cf. Figure 1). While oil demand tends to be slow moving, mainly driven by economic growth and to some extent climate policies, the prospects of future oil supply are highly uncertain – not least considering persistent political instability in exporting countries and the uncertainty regarding the discovery of new reserves. As a result of such uncertainties, oil prices could undergo further (increasingly) drastic fluctuations in the future.