Rhein on Energy and Climate

Within a few months oil prices have seen a precipitous decline from $ 100/barrel to $ 70/barrel. While consumers across the globe may rejoice, this development is bound to be judged with serious misgivings by the 2000 diplomats meeting as of today in Lima/Peru for another conference with the objective of containing the emission of green house gases.

The decline of the oil prices is the result of the USA becoming the biggest oil producer, thanks to the shale gas/oil “revolution”, the slow-down of world demand due to higher efficiency and slower economic growth and the refusal by the Gulf countries, enjoying by far the lowest production costs, to curb their production and restore higher prices.

Low prices are expected to continue until 2016 or longer.

Low oil price do not fit into a global climate situation that calls for high carbon prices to reduce the consumption of fossil fuels.

Governments should therefore rapidly react to the lower oil prices.

  • Those that still afford the luxury of granting consumer subsidies should seize the opportunity for phasing them out and thus reduce their budget deficits. This goes in particular for countries whose production costs are higher than present market prices, like Venezuela, Russia, Algeria, Iran or Egypt. Failing to do so will sooner or later put them into an unsustainable budget situation.
  • On the other hand, European countries must resist the temptation to enjoy the bonanza of temporary low oil prices. On the contrary, must not hesitate to raise their excise taxes and prevent consumers from getting used to the low prices. The extra revenue would best be used for reducing their budget deficit or extending subsidies to wind and solar energy whose competitiveness will will be impaired by low prices.

EU countries should lose no time in responding to the oil bonanza.

Eberhard Rhein, Brussels, 30/11/2014

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