Burning up: Fall in oil price could gravely curtail progress in slowing global warming

Public subsidies for the coal, oil and gas industries should be ended worldwide

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The Independent Online

Early days, but it seems Saudi Arabia has scored the first major victory in the great oil war. The decision by the world’s biggest mining company, BHP Billiton, to cut its US shale oil operation by 40 per cent suggests that the collapse in the price of oil, exacerbated by the Saudis pumping huge volumes to flood world markets, is indeed starting to make the exploitation of North American shale reserves unprofitable. That, in turn, will eventually reduce capacity, reduce supply and raise the long-term equilibrium price of oil and other fossil fuels. That, supposedly, will secure Saudi Arabia’s position as a low-cost dominant producer.

Or at least that is how thinking apparently goes in Riyadh. The obvious flaw comes if the price is eventually restored to such a level that fracking becomes profitable once more, and the whole belligerent cycle starts all over again. Perhaps the Saudis and their allies in the Gulf believe there is a “Goldilocks” oil price – too low for shale to be worth getting out of the ground, but high enough to protect their revenues. Given the potential, and unpredictable, impact on demand from slowing growth in the eurozone and China, in particular, that sweet spot in the oil price may prove more theoretical than real.

At all events, the prospect is for much more volatility in the price of oil, which has dropped by two-thirds in three years. It adds uncertainty to the outlook for the world economy, and that in itself will tend to depress investment and growth.

Unless the major producers in Opec and outside, including the United States, can come to some sort of arrangement about where they would like the oil price to be in future – unlikely given the complexion of some involved, including Iran, Venezuela and Russia – the world will have to get used to these gyrations. Such ups and downs, however, are preferable to permanently cheap oil. While it seems churlish to deny hard-pressed households a respite from ever-rising energy bills, the inconvenient truth is that cheap oil is bad for the planet. In the short term it makes consumers and industries less careful about energy efficiency. In the longer term it wrecks investment in alternative sources of energy and transport, such as electric cars.

The solution is obvious, if unpopular. Public subsidies for the coal, oil and gas industries should be ended worldwide. And in the UK now is the time to raise taxes and duties on energy to prevent its cost from falling too far, to industry and to consumers, either by compensating with increases to duty or by adjusting carbon pricing regimes in order that prices remain high. This is, admittedly, no vote winner. And yet the biggest single influence on energy consumption, after overall economic growth, is its price, and the price of fossil fuels relative to alternative sources of energy.

It is also true that taxes on energy can hit the poorest hardest, proportionately. That is why such a stabilisation of fuel bills at current levels has to be joined by curbs on excessive profits being made by energy companies, with those funds transferred to poorer households, so that they can cope with the high bills.

As is often observed, the UK accounts for only a tiny proportion of global energy consumption, and is greener than most. In much of the world energy taxes are far lower – and in places such as Indonesia, Iran and Venezuela, fuel is actually subsidised. Globally, consumers are enjoying their fuel and energy price windfall. It is a global issue, and the oil price collapse has made the work of this year’s international climate summit in Paris an awful lot more difficult.