Cooperating on future energy-based economic models

27 May 2013

Michael Kumhof, IMF, and Kjell Aleklett, Uppsala University.

Today’s economic models cannot explain how the shortage of oil will change the future growth of GDP. They must be combined with models that describe the expected future production. So said Michael Kumhof of the International Monetary Fund in Washington, at a seminar at the Department of Geo Sciences the 21 May. Recently the IMF economist pioneered a cooperation with Global Energy Systems at the Department of Geo Sciences.

At the seminar “Oil and the world economy – a few possible future scenarios” at the Department of Geo Sciences, Michael Kumhof gave his view of economic models for oil production and oil prices from, among others, the American Energy Information Administration. Since 2003 the authority’s predictions of the worlds future oil production have shown a steady decline. Actual production is no longer increasing and prices are rising. But there are no complementary models for the effects on the world’s GDP, said Michael Kumhof.

“To understand these effects we must go beyond the existing economic models, which are based on an out-of-date way of dealing with available statistics. To some extent we live in a new world and need to be able to approach it in a new way.”

Consequences for technology

The models of future oil production that Michael Kumhof has developed show global growth of 0.65% per year, with almost a doubling of oil prices over the next decade. Other predictions have already come true, for instance that decreased oil resources and increased prices have led to more expensive and dirtier extraction of shale oil.

Decreasing oil resources also affect technology, said Michael Kumhof, since it is largely dependent on oil. The challenges require seeing things from new angles, which has also led to his new cooperation with the research group Global Energy Systems led by Professor Kjell Aleklett.

“Energy is the basis for our entire existence; neither food production, housing nor economy would work without energy. Our group is trying to integrate different research disciplines and sees the offer of cooperation from the IMF as a great opportunity to put natural science and economic science in a context”, said Kjell Aleklett. “Our common goal is to achieve reliable predictions for the world’s future economy. Our knowledge helps to set certain limits that economists can’t exceed physically.”

Equations from reality

According to Mikael Höök, researcher at Global Energy Systems, there are many solutions to problems that risk worsening other problems. On one hand, a massive investment could boost an insufficient growth rate in GDP, but instead put the world in a much worse position with regard to energy security and climate.

“It is all about finding economic models that end up in the middle, where you combine the best of these two worlds and manage to get a model that integrates all factors.”

“We need to describe reality as closely as possible, and above all have a holistic approach.”