Historic volatility and unpredictability of oil prices have made dependence on investing in this commodity unreliable. Both importing and exporting nations are at risk of serious economic instability as a result of the continuously shifting market conditions, which put either upwards or downwards price pressures on fossil fuels. What can be done? Well its time to get serious about climate change reforms and break the dependency on fossil fuel and its volatility.
The first notable oil price spike occurred in the 1970s, at which point oil-importing states, including European and North American, were subject to an oil embargo by the OPEC oil producers. The result: price instability, inflation, and climbing interest rates plagued developed countries and then the global economy. As a result, in an effort to move away from foreign oil dependency, marginalized alternative energy sources were given room to develop in the global North. For example, between 1973 and 1989 the United States government adopted a new energy agenda designed to catalyze a statewide move away from fossil fuels, lower the negative environmental impacts of the economy, and improve energy sector variety. Yet, when global oil prices fell back down in the 1990s, much of the environmentally friendly reform stalled and many economies reverted back to oil and natural gas dominated energy sectors.
Between 2004 and 2014, increased global consumption and conflicts in major fossil fuel producing nations drove oil demand above supply, which renewed oil price growth. These market conditions encouraged new and existing producers to explore and drill for oil in hard-to-extract areas, such as Alberta, North Dakota, Texas and the Arctic. In 2014, oil prices drastically dropped again after demand tapered off in the financially compromised Europe, Asia, and North America. Rising oil production in Iraq and emerging efficiency measures in the developed world further exacerbated the price slide. Altogether, since August 2014, the price of crude fell from approximately US$100 to $44 per barrel.
Periods of instability that punctuate oil price history, highlight the importance of energy sector reform, which can be made all the more effective if paired with climate change considerations. The recent decline of oil prices has had dramatic ramifications of regional, national, and global proportions. Presently, both developed and developing countries are advised to recognize the shifting financial, economic, and political realities and adjust their governance approaches accordingly.
Climate change policy is one area, which requires significant restructuring in the wake of falling oil prices. Intuitively, it may seem that cheaply priced fossil fuels carry a strong negative connotation for climate change mitigation efforts. After all, high oil prices transmit a more appropriate price signal, better representative of the external damages associated with fossil fuel consumption. Similarly, high oil prices implicitly encourage research and development into energy alternatives by consumer nations and, in the absence of distortionary subsidies, discourage overconsumption.
Alternatively, high prices promote new extraction projects and investment into extraction technologies, as well as discourage economy diversification in oil exporting states. In order to avoid climate change pitfalls created by falling oil prices as well as take advantage of emerging opportunities, it is necessary to approach environmental reform in new and innovative ways.
In order to mitigate the potentially harmful effects of the recent drop in oil prices on greenhouse gas emissions reductions and renewable energy source development, swift action should be taken in the form of tax and subsidy reform and green energy investment stimulation. While dropping oil prices may not appear conducive to low-carbon economy growth, the current economic climate actually presents an opportunity to eliminate fossil fuel subsidies and even introduce previously contested carbon taxes. In other words, the time is right to invest in moving away from our dependence on fossil fuels.
To move away from our dependence on oil, we need governments to help the private sector to offset decreased private sector motivation to develop renewable energy sources through market and non-market mechanisms. Oil exporting nations, which have fallen victim to the resource curse, can also take this time to diversify their state economies away from the fossil fuel sector, a move that may involve expanding the service-based and high-tech fields. Such restructuring will lead to the creation of strong and resilient economies as well as an implicit reduction in fossil fuel consumption.
This piece is co-authored by Anna Klimbovskaia, Bessma Momani and Jonathan Diab
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