The collapsing value of a barrel of oil has been the most significant economic event of the year.  From a high of US$112 per barrel in June 2014, we now sit on US$69.62 on 4th December, 2014. The chief executive of Russians largest oil company, Rosneft, Igor Sechin, predicts prices will continue to fall to less than US$60 per barrel. The CIO of Ayres Alliance Securities predicts the possibility of a sub-US$40 barrel.

This drop has very significant consequences for the environment.  While prices remained high, the non-carbon energy sectors, such as wind, tide and solar, all of which are more expensive to produce at present than oil, could be seen as feasible, in terms of the government subsidies needed to cover costs involved in research, development and cost to the consumer.  However as the gap increases between oil and non-carbon sources, increased subsidies are needed for alternative energy sources to remain even slightly competitive,.  There have been many conspiracy theories related to the over-supply of oil on the market (resulting in the dip in price), and while not wanting to add another, this current slump delivers a death knell to any chance of a competitive alternative energy supply anytime soon, a plotline reminiscent of Cars II!   

As the cost of running our cars declines (though this is delayed as usual as the oil companies rake in the profit, since fuel prices have declined only 10% while oil prices have declined by almost 50% in the same period), we will be less likely to cut back on the amount of driving we do. Indeed, cheaper oil will impact on many consumer choices, since the price of oil underpins the price of many highly polluting products. Cost is the most successful controller of consumer decision-making.  Large increases in the cost of alcohol and cigarettes has seen decline in sales and improved health.  Increased oil costs means less damage to the environment.

The option of utilizing public transport and rebuilding canals for commercial transport becomes less economically preferable.  Meanwhile, the oil industry itself is threatened by low prices since exploration for more complex sources of oil becomes less financially feasible.  A recent report points to the crisis facing Brazil because of the huge, one quarter of a trillion dollar investment it has made in oil and gas based on prices at their peak.  They now face financial crisis at these new low prices.  Closer to home, our own economy will suffer as nuclear plants currently being built will be far from cost effective, and the need to import cheaper gas from overseas may become a necessity.  Further development of the North Sea resource will also be challenged. On the bright side for some, the cost of fracking in the UK, a process just beginning, may well be too expensive.

Ultimately cheap oil is good for heavy carbon-based industries such as manufacturing.  However given the diminishing supplies in many countries, including the UK, with what little oil we have left we would rather sell it at a good price in order to be able to invest in replacement technologies.  Cheap oil also discourages smaller nations with oil reserves from separating from larger nations.

 


Comments

09/19/2015 4:40am

The collapsing value of a barrel of oil has been the most significant economic event of the year. From a high of US$112 per barrel in June 2014, we now sit on US$69.62 on 4th December, 2014. The chief executive of Russians largest oil company, Rosneft, Igor Sechin, predicts prices will continue to fall to less than US$60 per barrel. The CIO of Ayres Alliance Securities predicts the possibility of a sub-US$40 barrel.

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