Low oil prices: better get used to if Paris deal means something

A lot of people ask us what we think the oil price plunge from over $100/bbl to $30 today will do to sustainable transport policy. The short answer is: there is no short answer. Better get used to it and make your policies robust enough. The long answer is below.

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I first want to relativise the plunge a bit. Since a lot of the oil dollar price fluctuation is related to the strength of the dollar, the swings in euro prices have been much less extreme. The oil price in euros, €30 today, has never exceeded €95/bbl. Also, some recovery is widely expected; crude oil futures (prices for delivery in the future) hover around $50/bbl. And clean energy prices – especially solar and wind – have plunged even more; solar panels cost close to 90% less than eight years ago. So while solar and wind prices will keep falling, the oil price is like the famous box of chocolates – you never know what you’re going to get.

It even has some silver linings. The dirtiest and highest-risk oils (tar sands, deep sea, Arctic) are supremely unattractive at today’s prices and that’s a good thing. And the badly thought-through rush to bad biofuels in the past decade also looks decidedly less smart today.

But the two most important points follow below.

Firstly, we need to see today’s low price for what it is; an OPEC power grab once again. Isn’t it time for Europe to say we’re tired of this and take our destiny in our own hands?

Secondly, and even more importantly, low oil prices are an inevitable result of successful climate policy. If we manage to make the transport system a lot more efficient and electric, oil prices will go through the floor – this time not because of oversupply but because of plunging demand. This price effect means that the economic benefits of climate policy are larger than generally expected; but it also means that climate policies also must be stronger than generally expected to withstand its rebound effect.

The market – through the oil price – works against solving the climate problem. Governments better get used to that idea, get used to low prices, rediscover the power of fuel taxation, and stimulate all forms of electric transport. Europe should help, notably through ambitious CO2 standards. Otherwise the promised 30% reduction of non-ETS CO2 emissions in 2030 will go up in (cheap) smoke.