Over the past two and a half years, world oil and gas prices have been subject to shocks to both demand and supply, and sometimes both at the same time. The resulting volatility in energy markets is both a reflection and a microcosm of a stalled global economy.
The price of Brent crude fell from a “normal” price of $68 a barrel at the end of 2019 to $14 a barrel in April 2020, as the Covid-19 pandemic spread across the world. Two years later, in March 2022, the price shot up to $133 a barrel, following Russia invaded Ukraine. Now it is falling once more amid growing fears of a US recession. But the price might rise sharply if the Chinese economy recovers from the stupor induced by its covid-zero policy.
What comes next, and how can policy makers keep an eye on environmental sustainability in the face of this market turmoil?
One reason oil and gas prices are so volatile is that short-term energy demand responds much more quickly to changes in growth than to changes in prices. So when an energy crisis hits, a big price swing may be needed to clear the market.
And the pandemic was the mother of all disruptions, causing the largest sustained shift in demand since World War II. Before covid-19, global oil demand was around 100 million barrels a day, but lockdowns (and fear) caused demand to plummet to 75 million barrels a day. Suppliers might not collectively shut off the spigot quickly enough (stopping a well that is spitting oil is not an easy task). On April 20, 2020, the price of oil briefly fell to minus $37 a barrel as storage facilities were overwhelmed and suppliers tried to avoid penalties for dumping.
Investment in new oil and gas production was already scarce before the pandemic, partly in response to global moves to shift economic development away from fossil fuels. The World Bank, for example, no longer finances fossil fuel exploration, including projects related to natural gas, a relatively clean energy source. Environmental, social and governance regulations and investments are reducing access to finance for oil and gas projects, and of course that’s what it’s all regarding. This is all very well if policymakers have mapped out a workable transition plan to reduce reliance on fossil fuels, but this has been challenging, especially in the US and Asia.
Oil, coal and natural gas still account for 80% of global energy consumption, regarding the same share as at the end of 2015, when the Paris Climate Agreement was adopted. Policymakers in Europe and now the United States (under President Joe Biden) have laudable ambitions to accelerate green energy during this decade. But the truth is that there was no plan to deal with the V-shaped spike in oil demand that came with the post-pandemic recovery, let alone the relocations of energy supply as a result of sanctions. that the West has imposed on Russia.
The ideal solution would be a global carbon price (or a carbon credit trading system if a tax proves unfeasible). In the United States, however, the inflation-ridden Biden administration is seriously considering going in the opposite direction, calling on Congress to suspend the federal gas tax of $0.18 per gallon ($3.785 per gallon). litres), for three months. The recently announced G7 plan to cap Russian oil prices makes sense as a sanction, but Russia is already selling to India and China at a deep discount, so this is unlikely to have much of an impact on the overall price.
Only recently, the Biden administration was using its executive powers to curb the growth of US fossil fuel production. He is now in favor of increasing production from foreign suppliers, including those, especially Saudi Arabia, whom he had previously rejected for reasons related to human rights. Unfortunately, being honest in limiting US oil production while absorbing other countries’ production doesn’t help the environment much. Europe, at least, had a half-coherent plan until the war in Ukraine highlighted how far the continent is — especially countries like Germany, which have taken nuclear power out of the equation — from achieving a clean energy transition.
As with all kinds of innovations and investments, strong growth in green energy requires decades of consistent and stable policies to help de-risk the huge long-term capital commitments that are needed. And until alternative energy sources can begin to more fully replace fossil fuels, it is unrealistic to think that voters in rich countries will re-elect leaders who allow energy costs to skyrocket overnight. the morning.
It is noteworthy that the protesters who have successfully pressured some universities to ditch fossil fuels do not appear to be pushing with the same intensity to turn down heating and air conditioning. The energy transition has to be carried out, but it will not be painless. The best way to encourage long-term investments by producers and consumers in green energy is to have a reliable and high carbon price; gimmicks like divestment initiatives are both much less efficient and much less effective. (I also advocate the creation of a World Carbon Bank that provides developing economies with financing and technical assistance, so that they, too, can cope with the transition.)
For the time being, oil and gas prices seem likely to remain elevated, despite recession fears in the US and Europe. As the northern hemisphere’s summer car travel season progresses, and with China’s economy possibly recovering from its covid-zero lockdowns, it’s not hard to imagine that energy prices will continue to rise, even if increases continue to rise. Federal Reserve rate cuts sharply curb US growth. In the longer term, energy prices look set to rise unless investment picks up sharply, something that seems unlikely given current policy guidance. Supply and demand shocks are likely to continue to roil the energy market and the global economy. Policy makers are going to need nerves of steel to manage them.
Kenneth Rogoff He is a former Chief Economist at the International Monetary Fund and Professor of Economics and Public Policy at Harvard University.
© Project Syndicate 1995–2022. News Clip Translation.
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