On April 17, representatives of 18 of the world’s oil-producing nations gathered in Doha to discuss an oil production freeze. No agreement was reached. With energy markets jittery about a supply glut, oil prices are expected to continue sliding.
Oil is more than a product. It is the very lifeblood of modern industry, the heart of global financial markets and the focus of global geopolitics. When we talked of energy security in the past, the biggest concern was Middle Eastern nations halting exports or price spikes hurting the economies of oil importers. After the 2008 global oil price rises, the sustained drop in oil prices since mid-2014 has caught many, not least the International Energy Agency (IEA) and US energy experts, by surprise.
Experts suggest that the reasons for the fall in prices are manifold and include a persistently weak global economy, technological breakthroughs in US shale oil production, development of new energy sources, structural changes in US oil consumption and the failure of oil producers to achieve consensus on a production freeze or cuts.
In addition, investors are using oil futures to offset the risk of investing in other markets. It is these non-rational financial transactions that are exacerbating oil price fluctuations.
For oil-exporting nations, the drop in prices is bad news and threatens their national finances. Last year, OPEC’s net oil revenue fell from a peak of US$2 trillion in 2012 to a low of US$500 billion, with the figure for this year forecast to fall further to US$320 billion. Oil producers, such as Algeria, Ecuador, Nigeria and Venezuela, which rely almost entirely on oil exports, are seeing not only their economies contract, but also face political instability. The finances of oil-producing nations in the Persian Gulf are now in the red, for the first time in two decades.
The IEA has warned that if prices continue to fall, it would adversely affect oil producers’ ability to invest, and this would damage the stable supply of oil in the future.
Falling oil prices would also hamper the economic development of oil-exporting nations and emerging markets, and affect global investment and trade, while causing energy share prices to drop, thereby weakening the currencies of oil-exporting states, which could lead to global financial turmoil.
Low prices are also increasing non-rational consumption. Last year, for example, the number of SUVs sold in the US and China increased, while the number of electric cars sold, despite China’s best attempts to promote them, declined. In February last year, China’s National Development and Reform Commission, in an effort to promote energy conservation and reduce pollution, ended cuts to refined oil prices to control fuel consumption.
Environmental groups are concerned that low oil prices discourage nations from developing renewable energy sources and from implementing the Paris climate agreement.
Taiwan relies entirely on imports for its oil, and yet its oil and electricity prices are lower than those of neighboring countries. Although this increases its competitiveness, it does little to improve energy-efficiency, with renewable energy sources making up a very small proportion of its energy consumption.
The government should consider, if oil prices continue to fall in the future, setting up a “price floor” policy: Should the international oil price fall below a certain level, the price will stay the same. The government could then use the difference to develop low-carbon technologies and renewable energy sources. This would not only increase Taiwan’s ability to address rising oil prices, it would also help it develop a low-carbon economy.
Young Chea-yuan is a professor at Chinese Culture University.
Translated by Paul Cooper
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