Outlook Don’t get too comfortable with minimal inflation.
The record low of 0.3 per cent recorded in January is starting to get people twitchy about deflation. But it was fuelled, to a large extent, by oil. As we ought to know by now, there is a drawback to using oil to fuel anything. In the case of cars, it comes in the form of pollution and carbon emissions. In the case of the economy, it is that any benefits will be transient.
BP warns of this in its Energy Outlook 2035. The report highlights that much of the production boom that has helped to send prices into a tailspin has been driven by North America’s enthusiasm for fracking, a process that is facilitating the energy independence that US security hawks have long craved. But fracking’s growth is slowing and, with the global economy continuing to expand, demand will soon start to soak up the excess production, perhaps within a couple of years.
In theory, the UK and Europe have the potential to pick up some of the slack, but the report’s authors do not think that will happen in practice, not least because of the environmental concerns, which are another pre-occupation of the report.
There is good news in its prediction that the growth in demand for energy among the world’s fast-developing economies is much more likely to be met by gas than it is by coal (gas is much cleaner). The renewables sector is also becoming increasingly important and economically attractive. Despite critics complaining about the subsidies handed to it (while turning a blind eye to subsidies given to fossil fuel producers), renewables are getting cheaper and the process is accelerating. As operators learn by doing, costs are coming down. Their increasing share of the energy market is driving economies of scale. These are welcome developments, but more investment is required. When oil producers start twitching about the impact on the environment of their energy projections, if they come to pass, we really ought to hear what they are saying.
There are signs that other sectors are similarly concerned: the insurance industry, in particular. But even so, we are still planning to pump a staggering amount of carbon into the atmosphere over the next 20 years. The impact of that may be far more economically malign than a bit of inflation. Or a bit of deflation.Reuse content