After several years at high levels, oil prices dropped by more than half between June 2014 and January 2015, leading many to ask questions about the implications for the economy and for countries’ and companies’ energy choices. Although such price swings have happened before, the issues being discussed are indeed quite important.
May 2015
After several years at high levels, oil prices dropped by more than half between June 2014 and January 2015, leading many to ask questions about the implications for the economy and for countries’ and companies’ energy choices. Although such price swings have happened before, the issues being discussed are indeed quite important. This note addresses some of them, building on the findings and recommendations of Better Growth, Better Climate, published September 2014. The theme of the New Climate Economy report is how to capture opportunities for structural economic change that improve economic performance, while also reducing greenhouse gas (GHG) emissions. This includes a number of changes in energy systems.
A key recommendation is to make energy prices reflect wider objectives: enabling the investment in new infrastructure, phasing out fossil fuel subsidies, introducing a carbon price as part of fiscal reform, and ensuring that energy prices reflect the substantial negative health impacts of fossil fuel use. The report also argues for accelerating the transition away from coal power to cleaner electricity sources, noting the potential to address acute air pollution problems, tap into the improving competitiveness and availability of alternatives, and avoid lock-in to high future greenhouse gas (GHG) emissions.
The report points to several factors that would enable a faster transition, including the improving cost-effectiveness and of renewable energy technologies, the lower cost of natural gas in some geographies, opportunities to increase the pace of energy innovation and improve energy efficiency, and better ways to finance low-carbon infrastructure. Overall, the NCE report finds that there is far less tension than is often assumed between building a good energy system that is secure, affordable, and clean, and reducing the energy system’s climate impact. Indeed, the two require many of the same steps. This note re-examines some of these issues in the context of much-lower oil prices. The central message is that the policy response needs to keep an eye on the longer term. Fossil fuel markets move drastically and unpredictably, but good policy does not. There are opportunities created by lower energy prices to support reforms with long-term economic benefits, from improved energy pricing to fiscal reform. Overall, however, countries economic and energy strategies need to be based on longer-term considerations.
Working Papers