The oil price is a problem

Oil_wellWhilst I am delighted to see that I can fill the tank of my ever-so reliable van for a fraction of what it cost this time last year and fly until my heart is discontent in the knowledge that the value of the airlines (share price) is increasing, they having done nothing more than survive three months since the oil price started to plummet, it is bad news. Why?

First, burning hydrocarbon fuels is bad for the environment and price is a key regulator of consumption. Second, many oil producing countries – some of them not the richest – have set their budgets at anticipated levels; for example, $100. The shortfall of $35 (reflecting today’s price-per-barrel) can make the difference between life-and-death. High oil prices, then, can be good transfer payments between rich and poorer countries.

Third, oil company shares are down sharply. With these stocks being some of the key investments made by pension funds, meeting obligations becomes more difficult. Fourth, investment in renewables will be hit. Suddenly it is only cost-effective to burn oil. Fifth, geopolitics. When demand goes down, price is often regulated by cutting supply. This is not happening for reasons which are currently unclear. However, there are some suggestions that it is a power battle between oil producing countries particularly in the middle-east rendering the region even more unstable than it already is. That is also not to mention the situation in Russia. Very much an oil economy that is suffering also from ludicrous EU sanctions. There is unrest ahead.

What about the positives? Well, I can think of one key positive. The glut in demand is, in part, caused by shale oil production in the USA and tar sands in Canada. These two practices are very damaging to the environment. $65 a barrel is not sufficient to warrant such production. Whether the firms will cease their activities remains to be seen, but what is clear is that where fracking has not yet started, it is unlikely to do so.

Picture: Flcelloguy/Wikipedia

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