January 26, 2011
During the last 12 months oil prices have risen by 15 percent, much less than either wheat or maize. At the London market they vacillate presently close to € 100 per barrel, about two thirds of the peak price registered in June 2008.
There is a priori no reason for concern, the more so as OPEC has the capacity to increase its supplies if it found prices rising dangerously high.
It is therefore surprising that the IEA has raised its voice and warned that higher oil prices might constitute a risk for the economic “recovery” of its member countries and the global economy.
That sounds like old-fashioned stuff, fitting better the 1970s than 2011. it is, indeed, difficult to understand how further rising oil prices might present a risk to the global economy, which keeps booming with a global GDP expected to rise by around 5 percent in 2011 and inflation rates in the OECD far below 3 percent.
Over the past 40 years oil has lost its preponderant role for the global energy supply.
For power and heat generation it has been largely replaced by coal, gas, nuclear and wind. The only sector where oil continues to play a dominant role is transport – vehicles , aircraft and shipping – which accounts for one third of EU energy demand and C02 emissions and is not presently covered by strict climate policy actions, except in the EU with high excise taxes.
A hypothetical rise of oil prices by 30 percent to € 130 per barrel, followed by a 10 percent increase in transport prices for people and goods, would have only minor repercussions on consumer price indices, say 2 percent spread over several years, depending on the pace at which the oil price will rise.
Of course, Central Banks will not appreciate any inflationary pressure. But if higher oil prices can accelerate the urgent transition to a low-carbon economy an additional inflation rate of two percent is well worth it.
A higher oil price will induce consumers to switch from oil to gas and change to more fuel-efficient engines. Higher fuel efficiency will neutralise much of the inflationary effects; together with a switch from oil to gas it will reduce C02 emissions. Both effects are highly desirable, even if they were to occur only very slowly.
Considering, however, the unlikelihood of OPEC raising prices OECD governments should seriously consider introducing or raising excise taxes on gasoline and fuel. This would have the same impact on oil consumption and C02 emissions as higher market prices without having the same inflationary impact: Governments only have to lower other taxes or reduce budget deficits. This goes in particular for the USA which so far has been unable to introduce effective gasoline taxes.
Would the IEA or OECD raise the same concerns? That should be rather unlikely.Author : Eberhard Rhein