“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

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.