An interesting scenario analysis was undertaken by ABARE for the APEC Working Group. A base case was developed where oil prices fall back to around US$36 by 2010 and three scenarios were tested against it.
Scenario 1: Oil prices increase 30 per cent above the base case and are maintained until 2010.
Scenario 2: Oil prices increase by 60 per cent and remain there till 2010.
Scenario 3: World oil and gas prices increase by 60 per cent and thermal coal prices increase by 30 per cent (the latter reflecting the lower substitutability of thermal coal for oil in the world market).
For the world, in scenario 1 real GNP was estimated to be lower by 0.3 per cent in 2006 and 0.6 per cent in 2010. This is broadly similar to this scenario's estimates for Australia (-0.3 per cent and -0.8 per cent respectively).
In scenario 2 world real GNP would be lower by 0.6 per cent in 2006 and 0.8 per cent in 2010. The estimates for Australia were the same as for the world in 2006 (-0.6 per cent ), but more severe in 2010 (-1.2 per cent ).
Scenario 3 showed greater realism by taking into account the relationship between world oil, gas and coal prices. In this scenario the reduction in world economic output was broadly similar to that for scenario 2 (0.7 per cent below the base case in 2006 and 1 per cent below the base case in 2010).
However, the negative effects were more muted for Australia. Australian GNP fell below the base case scenario by 0.4 per cent in 2006 and 0.9 per cent in 2010, reflecting gains to Australia from its net exports of coal and gas.