Sustained oil glut’s unsettling effects

When the Organisation of the Petroleum Exporting Countries (Opec) reached a production cut deal with other oil producers late in 2016, the cartel presented it as a temporary measure to bring the global market back into balance. The price of Brent crude fell last week below $45 a barrel and, although it edged up again at the end of the week, it has lost all the gains made as a result of the Opec deal. Despite a decision between Saudi, Russia and other producers to extend the cuts for a further nine months, traders are not convinced that the persistent glut in global supplies is a short-term aberration, or that these measures will suffice to eliminate it.

They have good reason to be sceptical. The International Energy Agency’s latest predictions are that global demand for oil will rise faster than previously expected in 2018— but that non-Opec supplies will rise even faster. US shale producers, hit when commodity prices fell in 2014, have become more efficient, proving that they can compete with oil below $50 a barrel and perhaps grow too. Renewable energy producers are also increasingly able to compete without subsidy.

On the face of it, lower and more stable energy prices should be a net benefit to the global economy, when they are the result of an increase in supply, rather than a fall in demand that reflects economic stagnation. However, even in the developed world, a sharp fall in the oil price has unsettling effects. Consumers stand to gain, but the overall boost may not be as pronounced as in previous decades, when rich economies were more energy-intensive and there was more scope for central banks to cut borrowing rates in response.

Any constructive vision of the future should include much lower dependence on fossil fuels, profitable renewable energy generation and greater efficiency throughout. The journey from this world to that one, however, is not without risks. /London, June 23.