Thursday, February 12, 2015

Cheap Oil is no Windfall

The rapid decline in the price of oil is fraught with misconceptions. A year and a half ago a barrel of crude that sold for more than $110 is now just over $50. The combination of OPEC (Saudi) oversupply, less European demand and American natural gas from fracking have driven the price of oil down.

The biggest fallacy about cheap oil is that this will be a boon for the American economy. Most Americans work in the service sector where energy constitutes small percentage of their annual budgets (less than 10 percent). So the economic benefits of cheap oil have been overstated.

Higher energy prices have the effect of increasing efficiency, while low prices tend to reverse this trend. The amount of energy used by Americans has steadily declined since energy prices spiked during the oil embargo of the 1970s. When the Organization of Petroleum Countries (OPEC) embargoed oil exports to the US in 1974, this spurred an unprecedented wave of efficiency.

So high energy prices are good for the economy because they spur efficiency while low energy prices invite wastefulness.

Low oil prices will not radically alter the economic picture in the US. While high energy costs have decreased demand and fostered efficiency, cheap oil will slow the trend towards decreased consumption and greater efficiency.

Declining oil prices increase consumption and decrease efficiency a combination that could prove disastrous for efforts to combat climate change which will cost the global economy trillions of dollars.  Oil accounts for about 42 percent of global carbon emissions so cheap oil will likely add millions of tons of carbon emissions to the atmosphere.

Cheap oil is not the economic boon it is touted as being, it undermines climate mitigation efforts, increases consumption and impedes efficiency. 

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