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Euro-zone countries, which are highly dependent on oil imports, suffer most in the short term. GDP losses in both Europe and Japan would also exacerbate budget deficits, which are already large (close to 3% on average in the euro-zone and 7% in Japan). The United States suffers the least, largely because indigenous production still meets over 40% of its oil needs.

The Impact on Developing Countries

The adverse economic impact of higher oil prices on oil-importing developing countries is generally more pronounced than for OECD countries. The economic impact on the poorest and most indebted countries is most severe. On the basis of IMF estimates, the reduction in GDP would amount to more than 1.5% after one year in those countries.

The Sub-Saharan African countries within this grouping, with more oil intensive and fragile economies, would suffer an even bigger loss of GDP, of more than 3%. As with OECD countries, dollar exchange rates are assumed to be the same as in the base case.

Asia as a whole, which imports the bulk of its oil, would experience a 0.8% fall in economic output and a one percentage point deterioration in its current account balance (expressed as a share of GDP) one year after the price increase. Some countries would suffer much more: the Philippines would lose 1.6% of its GDP in the year following the price increase, and India 1%. China’s GDP would drop 0.8% and its current account surplus, which amounted to around $45 billion in 2006, would decline by $6 billion in the first year.

Other Asian countries would see deterioration in their aggregate current account balance of more than $8 billion. Asia would also experience the largest increase in inflation in the first year, on the assumption that the increase in international oil price would be quickly passed through into domestic prices. The inflation rate in China and Thailand would increase by almost one percentage point in 2007.

Latin America in general would suffer less from the increase in oil prices than Asia because net oil imports into the region are much smaller. Economic growth in Latin America would be reduced by only 0.2 percentage points. The GDP of transition economies and Africa in aggregate would increase by 0.2 percentage points, as they are net oil-exporting countries.

The economies of oil-importing developing countries in Asia and Africa would suffer most from higher oil prices because their economies are more dependent on imported oil. In addition, energy-intensive manufacturing generally accounts for a larger share of their GDP and energy is used less efficiently. On average, oil importing developing countries use more than twice the oil to produce one unit of economic output as do developed countries.

The IMF estimates suggest that, in the sustained oil-price increase case, the net trade balance of OPEC countries would improve initially by about $120 billion or around 13% of GDP, taking account of lower global economic growth. Venezuela would gain the least and Iraq and Nigeria the most, reflecting the relative importance of oil in the economy. The impact of higher oil prices on economic growth in OPEC countries would depend on a variety of factors, particularly how the windfall revenues are spent.

In the long term, however, OPEC oil revenues and GDP are likely to be lower, as higher prices would not