A scenario of sustained high oil prices can no longer be discarded. If the uprisings in North Africa and the Middle East continue to spread to other countries over the next months, it is quite likely that oil prices will keep high, and may even reach new record heights. Not an unlikely development, particularly if protesters in Libya succeed in overthrowing Gaddafi. But instability will hardly stop with the overthrow of dictatorial rulers. Governance-building is a long process, with likely surges of instability. Attending the demands for jobs and income will not be easy. The global economy has not fully recovered yet, and the region’s troubled local economies need sweeping reforms before they can yield satisfactory results. Frustration of demands can refuel discontent and lead to new waves of instability.
This environment of uncertainty and stress can have an enduring effect on oil prices, leading to a relatively long cycle with frequent upswings, before prices start to settle down. This scenario could further deteriorate if this wave of revolt reaches Saudi Arabia. It looks rock solid today, but its gerontocracy has little future left. Change might be inevitable. Instability in Saudi Arabia would very likely determine a higher floor to oil prices. The effect of Libya’s instability on oil prices has do to with oil quality, rather than with the quantity at risk. In Saudi Arabia it is the other way around, it is about quantity. Sustained high oil prices would jeopardize the still shaky economic recovery in Europe and the US. It would also feed inflation. Food inflation that has resulted from extreme weather events all over the world over the last 14 months would be refueled. There is a clear and present danger of a setback to economic recovery.
The first time renewable, clean energy became more than a mirage was during the oil crisis resulting from the price aftershock when OPEC succeeded in regulating prices.
Today, oil around US$ 100.00 per barrel allows clean energy to break-even. This price level could help to offset subsidies to fossil fuels. The prevailing incentive structure leads to fossil fuel subsidies in almost every country. In the U.S., the “State Department, eager to keep the Saudi government happy and the oil in the hands of U.S. companies, negotiated a deal whereby the governments would raise their royalty payments the companies had to pay them, but to reclassify them as income taxes.” This has amounted to a total subsidy of $15 billion between 2002 and 2008. In Brazil, the government controls the price of gasoline and diesel through its state-owned giant monopoly, Petrobrás. Pump prices are kept below international fuel prices. Price controls and other subsidies distort the market value of fossil fuels giving the impression that renewable alternatives are less cost-effective. UNEP says on its most recent report on the ‘green economy’ that fossil fuel consumption subsidies were an estimated $557 billion worldwide in 2008, and production subsidies accounted for an additional $100 billion.
Do we have a sensible way out of this oil trap? Yes, let’s get back to a global “green recovery plan”.Today technology for renewable energy production is far more developed than at any previous episode of oil price upswings. The technological pipeline is chock full of new solutions for the production of clean energy, ranging from the later stages of R&D through to pilot plants. This is particularly true for the solar, wind, and biofuel technologies. Oil prices – and subsidies – are the main driver for investments in renewable energy technology. The longer oil prices remain high, the greater the incentive for investment capital to flow into these pipelines.
We really have an extraordinary opportunity created by the impact of this unexpected circumstance on oil prices to redirect the recovery process towards a green path. Eradicating fossil fuel and high carbon technology subsidies could be a good first step. Investing in renewable energy, and job intensive green sectors, such as green building and retrofitting, clean transport could start a painless transition to a low carbon economy at the present level of oil price. This new investment drive would create stronger foundations for a sustained and sustainable economic recovery. It can fuel a long period of progress.
Oil dependency has become riskier than ever. Political risk has increased exponentially. Oil price instability can lead to macroeconomic imbalances and higher fiscal expenditures. Political change in the Middle East could further weaken OPEC’s regulatory capabilities. Why insist on paying more, to increase pollution, and emissions, if we have the opportunity to become independent from oil by developing cleaner and healthier energy sources?
Conventional economics and strong interest groups have been blocking this path everywhere. The former disregards the sound fundamentals of the new green economy. The latter deny the need for it. Oil prices over US$ 100.00 a barrel, a very likely possibility for the next months, can do the trick, creating strong incentives for alternative paths towards growth, particularly if the oil price hike really stops recovery.