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!
Link to the New-York Times: http://www.nytimes.com/2014/12/05/upshot/falling-oil-prices-create-a-central-banking-conundrum.html?_r=0&abt=0002&abg=0
Link to the SCMP: http://www.scmp.com/business/commodities/article/1649741/free-fall-oil-prices-may-cut-both-ways-emerging-markets
D’Arge, R. and K. Kogiku (1973).
Economic growth and the environment, Review of
Economic Studies, 40, 61-77.
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