“Things Maxine found interesting in the
Economist this week: The effect of low oil
prices ”
Training Session 21 Jan 2015
Energy Debate
• Historically focused on two ideas:
– Scarcity
– Environmental consequences
Energy Debate
• Recent changes:
– Technological change has broken the power of the
Organisation of Petroleum Exporting Countries (OPEC) to
keep the price of oil high.
– Hydraulic fracturing (“fracking”) and horizontal drilling
have turned America into a big oil producer, with 4m
barrels a day coming from sources which used to be
deemed “unconventional”.
– An increase in supply, a surprising resilience in production
in troubled places such as Iraq and Libya, and the
determination of Saudi Arabia and its Gulf Allies not to
sacrifice market share in the face of falling demand have
led to a spectacular plunge in oil prices.
Venezuela Credit Rating
• Moody’s cut Venezuela’s credit rating to the lowest
level used for countries that are not actually in
default on their loans.
– The countries economy is suffering from the slump in
the price of oil, its main export.
– Shortages of consumer goods have pushed up inflation
and led to lengthy queues at shops.
British Inflation
• Britain’s annual inflation rate fell to 0.5% in
December, the first time it has been below a
percentage point below the BoE’s target of 2%.
– One factor behind Britain’s falling inflation rate is the
plummeting oil price (which has reduced the cost of
petrol for motorists).
Effect of oil prices on energy
companies
• Royal Dutch Shell cancelled plans for a $6.5
billion petrochemical project in Qatar because it is
“commercially unfeasible” in the “economic
climate prevailing” in the industry.
• BP announced big job cuts in its North Sea
operations.
Implications of Low Oil Price
• Low prices do not instantly cause supply curbs or
make investments dry up.
• Money in consumers’ pockets.
• Give a bit of breathing space to Governments.
Effects on Renewable Energy?
• Bits of the green energy world are wilting under
the impact of low oil prices.
– Some biofuels have become less attractive. The same
with electric cars.
• Will it incentivise investment in/ a shift towards
low carbon alternatives?
Economist Proposals for Change in
Energy Policy
• Remove all subsidies for producing or consuming
fossil fuels.
– Last year governments around the world spent $550
billion on these subsidies – from holding down the
price of petrol in poor countries to encouraging
companies to search for oil.
– By one count, such handouts led to extra consumption
that was responsible for 36% of global carbon
emissions in 1980-2010.
Economist Proposals for Change in
Energy Policy
– Subsidies do little to help the poor.
• In 2008 the poorest 40% of Egyptians received 3% of petrol
subsidies.
– Many countries spend more on oil subsidies than on
education or health expenditure.
• E.g. Iran, Venezuela, Ecuador and Algeria
– Now prices are tumbling, it is easier (and less
inflationary) to cut subsidies: the difference between
the free market price and the one expected by citizens
has shrunk.
Economist Proposals for Change in
Energy Policy
– Higher taxes on fossil fuels would encourage
conservation, dampen future price swings and provide a
more sensible way for governments to raise money.
• Carbon tax versus subsidies on renewables?
Motions
• THBT EU member states should nationalise all
their oil and gas resources in order to surrender
total ownership and control of them to an EU-run
energy agency.
• THBT it is the West's interest for long term Brent
Crud Oil prices to fall below US$60 per barrel.