Are Plunging Oil Prices Dangerous?

 Some analysis of the recent oil price drop from the Financial Times  - December 21, 2008

Read Full Article: FT.com / Comment / Analysis - Over a barrel

The plunging oil price is like a dangerously addictive painkiller: short-term relief is being provided at a cost of serious long-term harm. It took more than four years for oil to go from $35 per barrel in 2004 to over $147 in July 2008, and less than six months to fall all the way back again. For hard-pressed businesses and consumers in the US, Europe and other oil importers, the price collapse has been one ray of light in an increasingly gloomy economic outlook. But it has also caused a seismic shock to the energy industry worldwide, re-shaping it in ways that will often be unwelcome for oil consumers. The full implications have yet to sink in. “The industry is in shock; this has all happened so quickly,” says Daniel Yergin of Cambridge Energy Research Associates.

Already, however, the consequences are evident in project delays and cancellations, cost-cutting efforts and financial distress for many companies. More expensive forms of oil such as Canada’s tar sands, and alternatives to oil, such as biofuels, are at risk. Mr Yergin compares the threat to unconventional oil with the collapse in oil prices during the recession of the early 1980s. Then Exxon was forced to abandon a costly attempt to extract oil locked into the shale of Colorado. 

It is not only transport fuels, which compete directly with crude oil, that are affected. The price of oil is tied to the price of natural gas – formally by contract in some regions such as the European Union and Japan, informally elsewhere – so the price of gas has also fallen sharply. That throws into doubt the economics of forms of generation that compete with gas, including nuclear, renewables such as wind and solar, and coal. Cheaper oil and other forms of energy also weaken the incentive for businesses and consumers to use fuel more carefully.

Related: Environmental Economics: Over a barrel, FT takes it in stride

Tracking of the oil price: Crude Oil Price Forecast