Risky Business

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991225765_3f92287536For a handful of countries, the rise in oil prices has proven a boon to economic development. Russia is perhaps the most notable example. Bucking the trend in much of the rest of the world, the sale of new cars in 2007 in Russia jumped by 36 percent as a result of large increases in income, according to the latest edition of the Economist. But net oil importers are increasingly faced with a hard set of decisions about how to respond to this difficult environment. A new note in the journal Public Policy for the Private Sector provides guidance on exactly this conundrum.

Titled Oil Price Risks, the note lays out a method for measuring the vulnerability of oil importers to further price shocks. A country’s vulnerability is measured by the ratio of its net oil imports to GDP. The authors find that between 1996 and 2006 the vulnerability of 33 countries grew faster than the nominal price of oil.

The logical next step is to figure out what is driving this increasing vulnerability as a guide for public policy. The authors decompose changes in vulnerability into six factors—I won’t get into the details here, you’ll have to read the note for that kind of fun. I will point out one finding that seems particularly noteworthy from a public policy standpoint. In eight countries, energy intensity actually rose between 1996 and 2006. In other words, a number of countries saw some combination of reduced energy efficiency and an increase in the size of energy-intense sectors of the economy. In five of these eight countries, oil actually increased its share of total energy consumption. The authors politely suggest that “these countries may need to reappraise their energy policies in case oil prices rise even further.” Indeed!      


Ryan Hahn

Operations Officer

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