Rhein on Energy and Climate

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.

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  1. There are two separate problems Climate Change and Oil politics. They should be distinguished. While CC requires reduction of carbon, there are other ways to tackle it by applauding price rises from an oil cartel that can turn the supplies on and off at will and so manipulate the entire European economy. The IEA calculates that the rise to 90 dollars cost the EU more than the combined deficits of Greece and Portugal. The latter is a major problem, an existential crisis according to some — why is not the search for energy alternatives our most urgent priority? That is really existential. It would also free Europe from external pressures such as being at the wrong end to a multiple cartel blackmail. In the 1970s Arab oil producers embargoed all oil to Europe. What happened in the past can happen again at times of tension. It is a major political problem, especially when China is planning to take massive extra oil imports.

    It is not a free market and EU should take the appropriate action to protect European interests. It also needs to maintain a sound environmental policy. How that should be done requires sage reflection and urgent action. There are instruments to do it and the first Community (coal) and the second (Euratom) provide the possibilities and models for a European Energy Community.

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