Rhein on Energy and Climate

With $ 87/b the oil price has reached the highest level since October 2008, due to the recovery of the world economy and rising energy demand in Asia.

The International Energy Agency expects the oil demand to reach record levels in the course of the year and fears negative repercussions for global recovery if oil prices were to rise further.

This fear is unwarranted for three major reasons:

  • The present oil price amounts to less than two thirds of the record level of $ 147/b reached in July 2008 before the start of the recession. There is no reason to panic. OPEC will carefully monitor the evolution and avoid oil prices rising too much beyond what it considers a “perfect price level” of $ 70-80/b to protect producers against an ultra-rapid shift towards higher energy efficiency and alternative energies.
  • Oil has ceased to constitute a major input for industrial production and even less for power generation. It is mainly used for private consumption, especially by fuel- inefficient automobiles in countries like the USA.
  • The fast economic growth in China (+ 11 percent in the first quarter) and other Asian countries guarantees an adequate recovery of the world economy and shows how little the higher oil prices seem to affect the economic boom there.

The possible negative impact on the “recovery” would therefore have to operate essentially through private consumers buying fewer goods and services because they have to spend more of their incomes for petrol.

That is the conventional macro-economic argumentation. But it does not apply very well to China whose economic boom is driven by investment in real estate and equipment.

In Europe and other countries with excise taxes on petrol accounting for up to 70 percent of the petrol price, higher oil prices are cushioned by the fixed tax element. Moreover car owners could and should neutralise the higher oil price by driving less, switching to public transport and changing central heating to gas or wood pellets. The higher oil price should be another welcome opportunity for accelerating the overdue transition towards a low carbon society.

From a global climate perspective a price of $ 80-90/b is not enough to fully cover the social costs caused by burning fossil energies, on the ground and in the atmosphere. Governments should therefore be happy that the market accomplishes the job they have failed to do: include social costs into the price of fossil energies, coal, oil and gas.

Hopefully the US government will finally learn that it is economically preferable to share the monopoly rent with the oil producing countries by imposing hefty excise taxes, as Europe has been doing for the last 50 years.

Brussels 16. 04.10 Eberhard Rhein

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