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Page added on January 28, 2014

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Oil price volatility undermines economic growth

Consumption

Report co-authored by the former government chief scientific adviser says fossil fuels damage more than the environment

 

Sir David King

Professor Sir David King was chief scientific adviser to Tony Blair and Gordon Brown, and advises William Hague these days. Photograph: David Sillitoe for the Guardian

Governments need to deter oil speculators, set aside reserves of crude oil and take steps urgently to reduce their dependence on fossil fuels in order to escape price volatility that undermines stable economic growth, according to a report co-authored by one of Britain’s top scientists.

The exploitation of shale oil and gas may mitigate damaging price fluctuations in future but it will be terrible news for the environment and is not a longer term solution to the world’s energy needs, said the report co-written by Sir David King, published on Tuesday.

The study for Oxford University by King, Oliver Inderwildi and Zoheir Ebrahim, describes the volatility of crude oil prices, which has characterised this commodity market over the last four decades, as “a fundamental barrier to stability and economic growth” around the world.

King is a former Oxford professor and government chief scientific adviser who, these days, is special climate change representative for the foreign secretary, William Hague. The paper recommends policies to tackle supply and demand in the oil industry, including further action to clamp down on high frequency trading.

“Policy must focus on re-aligning the use of the oil derivative market away from speculation and towards its initial purpose: hedging. Improving derivatives market regulatory systems and working towards international derivatives regulatory standards will be vital in achieving this goal but efforts to curb speculation so far have been lacklustre,” says the report, which is called Macroeconomic impacts of oil price volatility: mitigation and resilience, and is published in Frontiers of Energy.

It predicts that the European Commission’s proposed Financial Transactions Tax will fail because it will not be high enough – at 0.1% on share trading and 0.01% on derivatives deals – and does not differentiate between speculators and genuine hedgers.

Britain’s use of fossil fuels will come under further scrutiny this week when a government-commissioned study will urge ministers to boost North Sea oil and gas production by forcing companies to share infrastructure.

Meanwhile the Oxford study calls for more far-reaching policies to manage demand in a bid to reduce the world’s dependence on oil.

“Part of this role will require the politically challenging task of energy subsidy and tax reform to incentivise the consumption of alternative fuels and disincentivise oil consumption, particularly in non-OECD countries where oil price subsidies have been institutionalised,” it said. “But a significant opportunity in reducing the demand for oil is also to be found in policies that are aimed at improving energy efficiency such as the adoption of fuel-economy standards and the construction of codes and requirements for greater energy efficiency in various sectors of the economy.”

The report’s authors highlight the importance of collective responsibility, discussing the strategic oil reserve administered by the International Energy Agency (IEA), which can be used to reduce price volatility in times of crisis. Given the IEA’s projection that oil prices will reach at least $215 a barrel by 2035, the study says global co-operation will be fundamental to the management and reduction of price volatility.

The study also suggests regulating to force large oil-reliant industries to maintain their own oil stocks, which would insulate them from sudden spikes in prices.

Governments should also incentivise business to invest in infrastructure promoting alternative fuel and energy sources or that promotes greener energy provision, says the study.

The authors note that additional unconventional fossil fuel obtained through processes including fracking will come online over the next decade, suggesting that they are highly likely to keep oil prices relatively low. It describes this development as “terrible news for the environment” but “excellent news for the economy” which will “buy us time for decarbonisation endeavours”.

Inderwildi, a Senior Policy Fellow at Oxford, said: “Unconventional fossil fuel resources are a blessing at the moment as cheap fuel will support the global economic recovery. In the long term, however, we have to reduce our reliance on fossil fuels because of the great damage they are causing to the environment and the toxic economic effect of price volatility.”

theguardian.com



14 Comments on "Oil price volatility undermines economic growth"

  1. Davy, Hermann, MO on Tue, 28th Jan 2014 1:53 pm 

    The global world is at a point of being in a “systematic predicament” at the point of diminishing returns. The problem is further compounded because of the intense systematic complexity. This systematic complexity make each and every action to improve or adjust to problems problematic elsewhere. This article calls for a move away from fossil fuels. This move sounds reasonable and noble for a number of reasons mainly climate and peak oil issues. Yet, it will also mean economic contraction. There has been no indication that society can move away from fossil fuels other than around the fringes. This move away from fossil fuels involves renewables who themselves need fossil fuels. Efficiency the other option has run its course and is near diminishing returns. For example in your home have you tried to get the kids to turn off lights and tv’s? The only way to reduce fossil fuels is economic contraction plain and simple. Yet, this cure is as bad as the illness. Systematic theory says a contraction is inevitable in all systems at least earthly ones. I would like a few more years to prepare. It is hard when you are making graduated preparations to get to that point where you feel you are marginally ready for a collapse. I would settle for a gentle correction and or contraction. A full blown collapse to a significant lower standard of living may be the end of preparations. These articles about moving away from fossil fuels are generally unbalanced because they do not mention the resulting outcomes.

  2. robertinget on Tue, 28th Jan 2014 2:10 pm 

    At least Sir David is being pragmatic
    enough to realize we will be needing oil for transportation and ‘conversion’ for some time. Sir David obviously understands the larger picture when he comments on harm to the environment as well.

    Old friends and I always joke about our advanced ages with running gag:
    “Sure beats the alternative”

    So it is with our economy and uncertain future.

  3. Northwest Resident on Tue, 28th Jan 2014 3:09 pm 

    “Unconventional fossil fuel resources are a blessing at the moment as cheap fuel will support the global economic recovery.”

    Define “cheap”. In relation to past oil prices, the price of unconventional and conventional oil these days is anything but cheap. It may be that unconventional fossil fuels are a blessing at the moment, because they are the only thing keeping America from having to deal with oil shortfalls. But I seriously doubt that unconventional fossil fuels or any fossil fuels are going to “support the global economic recovery.” The only thing that would support economic recovery would be enough excess energy to fuel that growth, and it seems to me that we’re barely holding the line right now — forget about excess.

  4. rockman on Tue, 28th Jan 2014 3:49 pm 

    “It may be that unconventional fossil fuels are a blessing at the moment, because they are the only thing keeping America from having to deal with oil shortfalls.” Maybe my view of the world is ass backwards. But as I’ve said before the boom in shale production has not been a good thing. In fact, as take it as one of the best indications of the PO crisis before us. The shales boomed because oil prices boomed. So: oil price boom = shale oil production boom. And that does not equal a good time for consumers. How would we have a short fall if we didn’t have the shale production? We wouldn’t have the shale production if prices weren’t high and we wouldn’t have high prices if we didn’t have high demand. And if we didn’t have high demand we wouldn’t have a problem with oil supplies…i.e. no short fall. We are importing fewer bbls of oil today and yet are sending more $’s overseas the when we were importing more bbls. The consumer is paying 3X as much for oil today as 10 years ago. How does that make these good times? And to anyone who says we’re better off producing more oil from the shales today then if we weren’t producing those formations is wrong: if we weren’t producing those shales it would be because the price of oil was too low to make them viable. And lower prices for the consumers, regardless of the source of the oil, are a good thing for the US economy. The circular reasoning some folks have on this issue continues to amaze me.

    Of course, the high price of oil is a good thing for one segment of the economy. Should I ID that segment and rub the salt into the wound myself or let someone else have that honor? LOL

  5. J-Gav on Tue, 28th Jan 2014 4:25 pm 

    The article makes some decent points but could have spelled out more clearly why volatility is anathema to the economy. It’s pretty simple: businesses are loath to invest in anything capital intensive, and projects that need high fossil fuel inputs are in that category, when they’re totally unsure about where prices for the inputs are going to be down the road. In other words, a relatively high price that’s more or less guaranteed to remain stable for a while doesn’t give them the jitters as much as prices hopping around all the time …

  6. ghung on Tue, 28th Jan 2014 5:33 pm 

    Our complex set of circumstances can actually be reduced down to one simple concept that most should be able to grasp: A global human collective in gross overshoot made possible by societies on life support provided by fossil fuels. The overall consequences of removing the collective from life support, while not easy to predict in detail, should be obvious as well.

    The most viable response is equally obvious: Remove one’s-self from complex systems life support before the plug gets pulled; disconnect from hyper-complexity wherever possible. Redefine standards of living in ways that don’t include total reliance on global supply chains and highly leveraged economies.

    It’s not a perfect plan, and predicting how things will play out when society-at-large awakens from its dream state is problematic, but at least one’s expectations will be more aligned with reality. My hedge fund is a garden and a good splitting maul; a reliable source of clean water and social capital among my neighbors. It doesn’t require a lot of imagination.

  7. GregT on Tue, 28th Jan 2014 5:41 pm 

    “Oil price volatility undermines economic growth”

    Should read; Oil price undermines economic growth.

    I’m sure that a stable, further 300% increase, would be just the ticket for continued growth.

    “It describes this development as “terrible news for the environment” but “excellent news for the economy” which will “buy us time for decarbonisation endeavours”.

    Yup, who needs a healthy stable environment, when we could keep the economy limping along instead. The time to decarbonize is now, buying time by adding further CO2 into the environment, is one of the most ridiculous statements that I have recently read.

  8. Kenz300 on Tue, 28th Jan 2014 6:04 pm 

    Oil has a monopoly on transportation fuels…… that needs to end.

    The more we diversify away from oil the the better.

    Bring on the electric, flex-fuel, hybrid, biofuel, CNG, LNG and hydrogen fueled vehicles.

    Oil from tar sands and shale is expensive to extract, environmentally damaging and needs to stay in the ground. There are safer, cleaner and cheaper alternatives.

  9. Stilgar Wilcox on Tue, 28th Jan 2014 6:22 pm 

    “if we weren’t producing those shales it would be because the price of oil was too low to make them viable. And lower prices for the consumers, regardless of the source of the oil, are a good thing for the US economy. The circular reasoning some folks have on this issue continues to amaze me.”

    Most people do not understand it is high prices and not new tech. (which as we know has been around for decades – in fact I did a frack job in Colorado for Halliburton in 1977) that made shale available. But it’s easy to see how they got that notion via numerous MSM articles claiming new technology (fracking) has put a nail in the coffin of peak oil once and for all. They also do not understand shale oil has a very high depletion rate, and last but not least do not understand the relationship of price to supply.

    Once another recession hits, whenever that is, oil price will drop and with it many unconventional sources and high risk exploration. Then we shift to even greater dependency to existing fields.

  10. GregT on Tue, 28th Jan 2014 6:36 pm 

    “Once another recession hits, whenever that is, oil price will drop and with it many unconventional sources and high risk exploration.”

    And as soon as prices drop, those that can still afford oil, will rapidly drive prices up again. Wash, rinse, repeat, until there is nobody left that can afford modern industrial society, except for the extremely wealthy. They would be well served to start building their ‘castles’ now, those that haven’t done so already.

  11. DC on Tue, 28th Jan 2014 10:06 pm 

    Kenz, please explain why, all those make-believe fossil-fooled vehicles will ‘save’ anything? Do you even read the articles in question? I have to ask, sorry…..

  12. synapsid on Wed, 29th Jan 2014 12:58 am 

    ghung,

    Can you email me? hibbertd@evergreen.edu

    Many thanks.

  13. action on Wed, 29th Jan 2014 1:53 am 

    Sometimes I wish I was deaf. I think it would be peaceful. At least it will be relatively quiet if full blown collapse comes, that’s something to look forward to.

  14. GregT on Wed, 29th Jan 2014 8:40 pm 

    action,

    If a ‘full blown collapse comes’, it most certainly would not be quiet, at least not for a while. Better to find the quiet places now, then to wait for the not-so-quiet places to become ‘peaceful’.

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