Don’t Celebrate That Cheap Oil

David Strahan in the Independent:

A falling oil price has real short-term benefits. Petrol has dropped below £1 per litre for the first time in almost a year; domestic heat and power bills should eventually follow; food prices and inflation should also ease, giving the monetary authorities greater freedom to cut interest rates.

But these benefits may prove fleeting because the collapsing oil price is bad for supply in the medium term. The cost of building new oil production capacity has soared in recent years, and many planned projects that were viable just a couple of months ago are uneconomic today. Christophe de Margerie, chief executive of Total, recently warned that if the oil price settles at $60, “a lot of new projects would be delayed”.

Others put the investment bar much higher, and that means the oil supply could soon fall short of demand, forcing the oil price sharply upwards. A recent research note from Barclays Capital argues that if oil prices stay below $90, large amounts of expected oil production capacity will not be built, and “the world faces a serious supply-side crunch as little as two years away”.

The oil price collapse also threatens renewable energy projects as their viability is judged against the cost of electricity produced from natural gas, which is itself determined by oil.

(h/t TOD)