Plunging Oil Prices May Do More Harm Than Good

The Financial Times analyzes the effects of the falling price of oil on energy markets and concludes that the short term economic gain for oil consumers will come back to bite them as investments in alternative fuels will cease as will conservation.
December 28, 2008, 7am PST | Irvin Dawid
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"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.

More expensive forms of oil such as Canada's tar sands, and alternatives to oil, such as biofuels, are at risk.

Cheaper oil and other forms of energy also weaken the incentive for businesses and consumers to use fuel more carefully.

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."

"Analysts such as Philip Gordon of the Brookings Institution have argued that Washington should set an oil price floor of $60 per barrel to give investors the certainty to invest in alternatives, but that idea faces practical hurdles. Higher petrol taxes – common in Europe – could encourage fuel efficiency and electric cars in the US, but are also highly controversial."

From The Washington Post op-ed - Charles Krauthammer, "Tax & Drill":
"The idea is for the government -- through a tax -- to establish a new floor for gasoline, say $3 a gallon. If the world price were to rise above $3, the tax would be zero."

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Published on Sunday, December 21, 2008 in Financial Times
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