The
Guardian view on the economic and environmental impact of falling oil
prices
Editorial / GUARDIAN
Wednesday 13 January
2016 19.50 GMT
The
economic implications of the tumbling cost of crude are momentous but
mixed. For the environment, though, it should at least mean that more
fossil fuels stay in the ground
A decade ago,
British civil servants were packed off on a training day about, in a
then-fashionable phrase, future-proofing UK plc. The idea was to game
the mid-century economy on a range of feasible assumptions, one of
which concerned the oil price. There was an “expected case” for
2050 of $45 a barrel, a “best case” of $35 and a “worst case”
of $55. So much for the bureaucratic imagination. Over the short
years since, the price has twice been more than double the so-called
worst case, and then twice also come skidding down by two-thirds.
We are currently in
the midst of a great oil collapse, with prices sinking to within
touching distance of $30 on Tuesday afternoon, 73% down on 18 months
ago. As with every climb up and every slip down the greasy price
pole, analysts are scrambling around to figure out whether the change
will endure. Nobody can know, but when financial sentiment swings,
some always conclude that it will soon swing even harder. The RBS
note for investors which this week unleashed a note of panic by
advising them to “sell everything” mentioned the possibility of
$16 a barrel, a number with little obvious basis apart from being
half the current price.
But there are solid
reasons why the world has now convinced itself that oil is worth much
less than before. On one side of the ledger there is supply, not only
of oil itself, but also of the other fossil fuels which can often
substitute for it, notably gas, which is more abundant than anyone
would have imagined a few years ago, courtesy of the fracking boom.
On the demand side, things have been developing even more rapidly,
with a serious slowdown in the resource-intensive emerging economies,
above all debt-laden China. The fracking revolution will not be
reversed, and it increasingly looks like the Chinese flu will be hard
to shake. All of which suggests that low oil prices could be here for
a while.
So is this a good
thing or not? The potentially profound geopolitical consequences are
considered in today’s other editorial. Economically, the standard
western assumption is that cheap oil is a boon. Certainly, price
spikes have arrived shortly before recessions, as in 1973, 1979-80
and 1990. But cheap oil can be a consequence as well as a cause of
economic weakness, as it was in 2008, when it became a mere symptom
of the great recession. The best that can be said of cheap oil today
is that the global slowdown would be sharper without it.
What of the
environmental effect? Here, although the story is complex, there is
more reason for optimism. Start with the premise of the Guardian’s
Keep it in the Ground campaign, that the only way to avoid
catastrophic climate change is to leave the bulk of the world’s
remaining fossil fuels where they are. Cheap oil encourages waste;
worse, it discourages investment in a more efficient “energy
infrastructure”. Renewables, as well as upgrades to clean up fossil
fuel power stations, yield less return. Drivers feel less pressed to
trade in their SUV for a G-Wiz, and car manufacturers are less
inclined to concentrate R&D on fuel economy.
But cheap oil also
discourages investment in fossil fuel extraction. Already, this week
has seen BP scale back its North Sea operation. Indeed, one reason
why the Saudis are prepared to endure $30 a barrel is because they
hope it will discourage American frackers from switching their focus
from gas to oil, and making investments that – once the capital is
sunk – become too costly to abandon. If “keeping it in the
ground” is indeed the priority, this is the worst outcome of all;
by discouraging it, cheap oil is a force to the good.
Bargain-basement
energy should also be the spur for far-sighted politicians to act on
carbon pricing and other regulations and taxes that can’t be done
when prices are high. In Paris last month, world leaders wrote
post-dated cheques to the planet. Cheap oil is the opportunity to
make a down payment.
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