The upside of cheap oil

The following is an excerpt from an editorial this week in the Guardian: We are currently in the midst of a great oil collapse, with prices 73 per cent down on18 months ago . . . So is this a good thing or not? Economically, the standard western assumption is that cheap oil is a boon. Certainly, price spikes have arrived shortly before recessions, as in 1973, 1979-80 and 1990.

But cheap oil can be a consequence as well as a cause of economic weakness, as it was in 2008, when it was a mere symptom of the great recession. The best that can be said of cheap oil today is that the global slowdown would be sharper without it.

What of the environmental effect? Here, although the story is complex, there is more reason for optimism.

Cheap oil encourages waste; worse, it discourages investment in a more efficient “energy infrastructure.” Renewables, as well as upgrades to clean up fossil fuel power stations, yield less return. Drivers feel less pressed to trade in their SUV for a G-Wiz, and car manufacturers are less inclined to concentrate R&D on fuel economy.

But cheap oil also discourages investment in fossil fuel extraction. Already, this week has seen BP scale back its North Sea operation. Indeed, one reason the Saudis are prepared to endure $30 a barrel is because they hope it will discourage American frackers from switching their focus from gas to oil, and making investments that — once the capital is sunk — become too costly to abandon.

If “keeping it in the ground” is indeed the priority, this is the worst outcome of all; by discouraging it, cheap oil is a force to the good.

Bargain-basement energy should also be the spur for far-sighted politicians to act on carbon pricing and other regulations and taxes that can’t be done when prices are high. In Paris last month, world leaders wrote postdated cheques to the planet. Cheap oil is the opportunity to make a down payment.