The above is Table 3.1 of the IMF World Economic Outlook, with added orange boxes. I've tended to be an inelasticity hawk, but these numbers are really eye-popping. -0.007 for emerging market oil price inelasticity! That implies a 10% increase in oil prices produces a negligible 0.07% decrease in consumption. That's the short term number, but even the 20 year horizon is only -0.035. Meanwhile, short term global income elasticity is 2/3. So that 4% economic growth requires 2 1/3% annual increases in oil production to keep prices stable.
Can inelasticity really be this bad? On a global basis, I've assumed -0.05 (eg here), but they are saying -0.02. More later, I'm sure...
Update (3pm EST):
It's worth making a couple more points here.
- Note that these IMF estimates are based on the 1990-2009 interval. This was a period of generally low oil prices, except for a single price spike from 2005-2008 or so, and very widespread access to credit in developed countries.
- Access to credit is now more constrained, forcing some people to economize, rather than being in a position to borrow in order to bid prices of perceived necessities higher. This will make demand more elastic.
- Adaptation as a result of the 2005-2008 price spike was very limited (eg the impact on the US fuel economy averages was quite subdued). Experience from the 1970s was that the really big changes came after the second shock (in 1979/1980), rather than the first (in 1973/74). It may work the same way now.
- In particular, if oil prices go high enough, often enough, we would expect that to trigger large scale switching of transportation options to plugin-hybrids, compressed natural gas, etc. It will also promote more use of smaller cars, scooters, electric bicycles, etc.
Still, for the short term...
Update 2 (4pm EST):
And here's the elasticities when they extend their period of estimation back to 1965 (ie including the 70s oil shocks):
Still pretty small. Note also that a lot of the adaptation in the late 70s and 80s was stopping using oil for power generation. There's not much of that option left, which is one of the reasons things have gotten more inelastic since.