jeudi 4 décembre 2014

Bad news : Oil prices are falling !

Why is there this general feeling that the current persistent fall in oil prices is a bad thing? Thinking back to the 70’s, when the oil shock was made responsible of all the economic turmoil, it can be surprising.
For developed countries, some people (like Mario Draghi) are afraid that it may cause deflation or at least feed self-fulfilling deflation, by generating the feeling of deflation (see NYTimes). But it may simply serve as an excuse for central banks that argue not to be responsible for the deflation. For developing countries, it may hinder their growth provided they are oil exporters (see SCMP).
However, the most important issue to me has a worldwide scope: these low prices affect fossil fuel consumption and climate change. Renewable sources of energy are too expensive but their opportunity cost becomes even higher with cheap oil. Moreover, low prices indicates (at least partly, there may be action from the demand side as well) an abundant supply, meaning that economists should remove the exhaustibility constraint from their models that in some way was helping to mitigate climate change (since D’Arge and Kogiku; RES 1973).
Anyway let’s keep hope: you can always find engineers that are convinced that the peak oil is something relevant … and even very frightening!
D’Arge, R. and K. Kogiku (1973). Economic growth and the environment, Review of
Economic Studies, 40, 61-77.

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