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Despite rising living costs, price of oil remains affordable

BySophia Bashir

Mar 29, 2016

Oil prices are at their lowest point since the 90s, having dropped to $26.21 a barrel in February. This contrasts with a decade of relative stability in oil prices, with an average cost of $100 per barrel, before the global oil market fell sharply by 70 per cent in June 2014. On the ground, gasoline consumers are benefiting from reduced costs. This is particularly noticeable for low income families, for whom heating bills (and the costs of running a car) take up a higher proportion of earnings. On the flipside, current estimates suggest that 250,000 oil workers have been made redundant. Furthermore, there are concerns that this dip in gasoline prices will divert interest (and, thus, vital funding and research) away from greener fuel alternatives.

The reason for the fall in oil price is simple economics: supply and demand. Due in part to increased efficiency of motor vehicles in the western world, there is less demand for oil. Additionally, production has been increasing. New projects, such as those in the Gulf of Mexico, and higher domestic production in the US have led to increased competition across the global market, pressuring manufacturers to drop their prices. The Organisation of Petroleum Exporting Countries (OPEC) are planning to cap output levels in Saudi Arabia, Qatar and Venezuela, the eventual aim being to stabilise oil prices. However, the recently lifted western sanctions in Iran will allow it to become a key player in the global oil market again (alongside Iraq, where production is actually increasing). There are many factors to consider, but while supply so grossly outweighs demand, it is difficult to predict exactly when oil prices will recover.

A question remains as to whether or not this fall in oil prices will adversely affect climate efforts and the green energy industry. “The fall of oil prices in the 80s was the main reason behind the collapse of many renewable energy projects”, said Salem al-Hajraf, speaking for Kuwait at the International Renewable Energy Agency (IRENA) conference in January. Admittedly, the landscape of fuel and energy production has changed since then. While oil dominates the transport industry, greener fuels (such as wind and solar power) tend to be used for electricity generation. For the most part, oil is operating in a different market to the renewables; the effects of oil prices will likely have limited influence, except for perhaps a negative impact on the green transport industry.

Bloomberg estimates that by “2022 electric vehicles will cost the same as their internal combustion counterparts”. Cheaper batteries (they currently make up a third of the cost of building an electric car) would bring in real cost reduction. Until that point is reached, a combination of two things must occur: customers must accept that driving electric will cost them more, and car manufacturers must accept narrow profit margins. This does occur, but may become increasingly difficult to maintain, especially in the face of attractively cheaper oil.

If forays into renewable energy over the past few decades had simply been a response to rising oil prices, then perhaps there would be a problem. But that does not seem to be the case. Subsidies exist to help support greener initiatives, and there is no indication that the government is planning to change this. On a global scale, China (facing a crisis of polluted air in its main cities, and pressure from citizens) has begun the largest green power initiative ever seen. In the majority of US states, a compulsory proportion of power must come from renewable sources.

Environmental concerns will always come second to economic viability, but, all things considered, the world seems unlikely to abandon greener technology, however far oil prices drop.

Image: Lewis Pratt

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