Reaching net zero emissions by 2050 will require an 80% reduction in global fossil fuel extraction compared with 2021 levels. This column estimates the macroeconomic consequences for fossil fuel-producing countries of large declines in extraction, based on a new dataset identifying 35 episodes of major and persistent, exogenous declines in extraction activity. These declines lead to persistent negative effects on real GDP, trade balances, and domestic sectors of the commodity producers. The real exchange rate depreciates, but not enough to offset the decline in net exports. Impacts on low-income countries are likely to be significantly larger than for high-income countries.
Reaching net zero emissions by 2050 will require an 80% reduction in global fossil fuel extraction compared with 2021 levels, according to the International Energy Agency (2022). Though the pace and nature of the transition are highly uncertain, it is worth asking what economic repercussions a contraction in fossil fuel extraction could have for fossil fuel exporters. Given the unprecedented nature of such drastic declines, the academic literature so far has largely focused on parameterised model-based assessment to predict the potential effects. To shed light on this empirically, our new paper (Bems et al. 2023; see also the IMF World Economic Outlook’s Commodity Special Feature, IMF 2023) identifies 35 episodes of persistent, exogenous declines in extraction and estimates their impact on major macroeconomic variables.
A new data set on declines in extraction
The empirical exercise relies on a new country-level data set on extraction volumes for oil, coal, gas, and metals from 1950 to 2020. To deal with endogeneity, the analysis identifies 35 episodes involving persistent, exogenous declines in extractive activity out of a total of 154 observed episodes. It verifies that these episodes are driven by factors that are exogenous to economic conditions in the country, such as depletion or sector-specific policy changes. A clear example of an exogenous episode is the sudden tax increase on bauxite mining in Suriname in 1974, which led to a persistent contraction in bauxite output (for other examples see Bems et al. 2023).
Extraction declines driven by global recessions, policy decisions directly affecting other sectors of an economy, and structural transitions such as the breakup of the Soviet Union and civil wars are excluded. In addition, the study assesses extraction forecasts from IMF Staff Reports before and during the identified declines and documents that the declines were usually unanticipated by public agencies.
Across those 35 identified episodes, the typical episode implies a 10% contraction in extraction activity in the episode’s first year that cumulates to a 40% reduction over 10 years (Figure 1).
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