Consequences of low oil prices

An interesting article in The Guardian today about the fall in crude oil prices by someone who should be expected to know about such things. (Less and less do I read pieces by non-specialist journalists; their knowledge is often shallow – we can all google, pal – and cleverness in putting together an argument isn’t an adequate substitute for a comprehensive grasp of facts.)

Since June 2014 the price of crude oil has dropped by more than 70%. So, this is my summary of the article’s reasons for and possible impacts arising from the recent sharp drop in oil prices:

  • After the “Arab spring” in 2011, Middle Eastern and North African oil-producing countries tried to keep prices high so that they had funds to pacify their populations. (Bread and circuses?) That stopped working a couple of years ago.
  • An increase in shale gas production in the US in the last 8 years sharply increased the global supply of oil.
  • After initially trying to keep oil prices high by reducing production, Saudi Arabia admitted defeat and increased its output; as a low-cost producer, it can trump high-cost producers like the US.
  • In the UK, the price of petrol has not fallen as much as the price of crude oil because of the fixed rate of tax on the product.
  • Future production of North Sea oil is problematic: existing infrastructure is getting old but may not be replaced if the oil prices remains low. Globally, investment in conventional oil production is unattractive at such low prices. One possible consequence therefore is a reduced supply of oil in the future, with the potential for “price shocks”. (Ah, 1973.)
  • Oil firms in February 2015 – before the price drop – had more than a 13% share of the FTSE 100 share index; British pensions are tied to these stock market valuations.
  • Renewable energy starts to look really expensive in an era of low oil prices. Welcome back, carbon.
  • Oil price competition between historically unfriendly countries (Saudi Arabia and Iran) can only worsen their relationships.

Yes, I knew all this stuff in a discrete way, but it was good to have it laid out so clearly . . . and rather chillingly.

A consideration not mentioned by the writer (probably because he’s not as parochial as me) is that people are unlikely to switch from the private car to something more sustainable while they can fill their petrol tank for so little.

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