Some general equilibrium effects of declining crude oil production in Australia

Abstract

Crude oil production in Australia is expected to decline significantly during the 1990s. As a result, net imports of crude oil could increase sharply over the period. In this paper, macroeconomic, intersectoral and interindustry effects of a fall in domestic crude oil production are examined. General equilibrium effects are estimated using ORANI, a large multisectoral model of the Australian economy. By itself, the reduction in crude oil production would require restraint in domestic expenditure and a decline in Australia's real exchange rate in order to offset the expected rise in net crude oil imports. Furthermore, a contraction of the domestic oil industry would result in a small decline in gross domestic produce together with an expansion of other import-competing and export industries. It is important to note that other changes in the energy sector, such as the substantial expected increase in production of coal, uranium and LNG over the next decade, have the potential to more than offset the macroeconomic effects of reduced oil production.