The oil price: what’s happening, what next?
Herewith an attempt to marshal my thoughts about what’s happening on the oil price (which has fallen sharply over the last few weeks), what’s likely to happen next, and what policymakers need to do to move forward. Brief summary as follows:
– The oil price has fallen sharply over the last couple of weeks, from a peak of $147 to a 7 week low of $123 at close yesterday. So is this the start of a long decline, or just a brief pause to draw breath before a resumption of the relentless upward march of recent years?
– In a nutshell, probably more like the latter – but with the potential for a big drop in the near term for as long as the credit crunch lasts, as emerging economies slow down sharply in line with falling US demand for their exports.
– However, once we’re through the crunch, we may be back to a game of cat and mouse between oil supply and economic growth. Demand falls, oil price falls; demand picks up, oil price goes back up too – but never for long enough to give investors a clear signal to pump cash into new oil supply infrastructure.
– What we need is a game changing intervention that breaks us out of this stop-start cycle. Massive investment in new oil supply would provide it, but can’t be squared with what needs to happen on emissions reductions.
– It looks like the only way through is for policymakers to agree a global climate policy framework that’s both global in scope and sufficiently long term to provide investors with an unequivocal signal of where to put their cash: this is the only way of squaring energy security with climate change.
Full version after the jump.