What the Decline in the Price of Crude Oil Hides

THE LOWER COST COULD MEAN THAT THE ENERGY SYSTEM IS CHANGING

by Matteo Di Castelnuovo, Josephine Ashipala and Marzia Sesini, Master Mager Bocconi

After nearly five years of stability, global oil prices have fallen by more than 60% over the past seven months. At the end of 2014 the Organization of Petroleum Exporting Countries (OPEC) failed to reach an agreement on cutting production, thus further collapsing oil prices. This has led to significant revenue shortfalls in many energy exporting nations, especially Iran, Nigeria, Russia and Venezuela, while consumers in many importing countries are likely to benefit thanks to lower energy bills and petrol prices.

Such developments may suggest that we might be entering the last stage of an energy system transition.  The continuous descending crude oil prices and the increasing adoption of renewables are but some of the indications.  With the upcoming climate conference in Paris this December many find it hard to believe that the world will finally reach an international agreement on climate change especially seeing that Europe, the frontrunners when it comes to climate policy, is not able to set a carbon price that ought to be significantly higher than its current level.  However, as recent events demonstrate, change does not come through only via legislation and international treaties.  Technology is much equally if not more important in driving it and there is fundamental evidence that changes are coming, which puts a question mark especially over investments in the fossil fuels.  Speaking in Bocconi on 6 March, Nick Butler (Editor, Financial Times blog on energy and power and Chair of the Policy Institute at King’s College London) explained some of the economic reasons why the oil industry has been facing such drastic falls in crude oil prices over the past seven months and left the question on whether gas price could follow a similar path.

He highlighted that new regulations and improved technology as well as the environmental awareness of the general public are driving the adoption of renewables and bringing the oil industry to a new phase.  He also touch based on some of the advancements tooking place around the world to drive this change.   Governments have started undertaking many efforts for deploying renewable energy for a more sustainable world, including Europe, although more should be invested in research. Thanks to investments in new cleaner and more affordable technologies (e.g. solar photovoltaic panels), several countries including China and the USA are making significant progress in this direction, in order to reduce their need to import oil and gas.

As oil prices continue tumbling down, one thing is clear, i.e. that the new generations will continue riding this change towards a more sustainable world.