Rhein on Energy and Climate

In its 2009 World Energy Outlook the International Energy Agency (IEA) has warned of rising oil prices having a negative impact impacting on the global economy in the coming years.. According to the IEA the dramatic rise of oil prices to almost $ 150 /b in mid-2008 has been one causes of the global recession.The production from existing wells is likely to decline in the course of the next decade. This production gap will be difficult to replace from newly discovered fields. Investments in exploration and development of new fields have fallen dramatically in the last 12 months, due to the recession and the steep fall of oil prices from the peak of $ 147/b in July 2008 to $ 35/b in early 2009.

On the other hand, demand for oil is expected to rise rapidly, especially in Asia. Such expectations, supported by speculation, have led to a doubling of oil prices in 2009, from $35 to $ 75/b. And the forward price for oil in 2017 is close to $ 100!

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In contrast to oil, the IEA projects a gas glut in the coming years, owing to the discovery of substantial non-conventional reserves (shale gas) in the USA, the connection of the Central Asian reserves to the West and rapid progress in LNG supplies.

These developments should not be a drama for the global economy.

OPEC will try to keep prices down as long as possible by raising production quotas. It has no interest in pricing itself out of the market prematurely.

Lower gas prices are a welcome feature of the future energy market. They will induce consumers to accelerate the switch from coal and oil, which will help lowering global C02 emissions, as gas contains only two thirds of C02 of oil and even less of coal. The IEA rightly considers gas as a “bridging energy source”.

Above all, humanity needs a rapid and substantial rise of fossil energy prices to induce the required changes of consumption habits: raising efficiency and switching to renewables.

The automobile industry would speed up its research and development efforts for the electric and fuel cell engine even more if it were sure that oil prices will rise beyond $ 150/b in the 2020s

Far from regretting the prospect of higher oil prices –and lower gas prices – governments should tell their citizens to prepare for this juncture and stop buying automobiles with high fuel consumption. The recent EU and USA tightening of fuel efficiency standards are therefore most welcome steps to cushion any expected rise of oil prices, though they should have been introduced 10 years earlier.

The IEA warning shows the apprehension of policy makers about higher energy prices. Governments are loath to introduce or raise petrol/fuel taxes. The USA is a prime example. They prefer other more indirect means to make fossil energy more expensive, from C02 caps and trading to fuel consumption standards and sophisticated forms of road taxing.

They shy away from taxing energy because they fear voters` reactions. They continue to preach the virtue of low energy prices instead of telling their citizens that higher energy costs are indispensable to transform our energy system and minimise unsustainable climate change.

Energy prices reflect the global economic activity. That is why the oil price has fallen by two thirds from its peak in the summer of 2008 to the trough in early 2009 and doubled since to $ 75-80/b. Forward prices for 2017 are quoted close to $ 100! These fluctuations are reflected in C02 emission prices: the London market price is presently about € 13 per ton, compared to a minimum of only € 8 per tons a few months ago.

Citizens have become increasingly more aware of energy prices. But they do not understand the need for high energy prices as an optimal incentive to steer our societies onto a clean energy path. The higher the cost of energy the more attractive for households and business to save it and replace fossil energy sources by solar and wind power.

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Our political class needs to grasp that higher energy prices are a blessing rather than a curse for societies. It does not matter whether we look at C02 emission or oil-gas-coal prices! If Mmarket prices of oil-gas-coal will do not increase rise fast enough to boost the transformation of our habits, last not least because OPEC is afraid of losing its clients. Ppoliticiansal leaders therefore need the courage to “correct” the marketthe market failure by imposing progressively rising taxes on the use of fossil energy. They must convince their voters of the need to do so and introduce “revenue-neutral” “eco taxes” systems, whereith lower income taxes go down and green taxes gas go upneutralising higher excise taxes on petrol and fuel..

This is not easy nor comfortable. Sweden and, more recently, France havehave shown that this is possible bypossible introducing carbon taxes, though, to start with, at low levels.

It would be helpful helpful for if the EU Commission to pick up the issue in 2010, after the dust from Copenhagen will have settled.

Brussels, 14.11.09 Eberhard Rhein

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