According to the FT Opec has said it will not cut oil production even if the price of oil falls to $20 a barrel.
That is their right of course: no one can tell them what to do.
Equally the potential for harm that this could create is something we should not ignore.
We cannot ignore the rate of depletion of oil stocks that this might encourage.
Or the massive environmental impact.
Or the instability it would create in the economies of many countries.
Or the harm it would cause to the development of alternative energy sources when investment in them is vital.
These are all potentially devastating.
So let me suggest the obvious, which is that if Opec wishes to cut prices, we should let them. But we must respond by taxing carbon to make sure that all the harmful consequences do not flow.
The benefits of such a tax would be enormous - especially if put in place across the EU as a whole, for a start (I cannot see the US cooperating).
A new source of government revenue would be opened.
Oil would remain the resource whose use we should seek to minimise.
And financial flows would reduce - which would be seriously beneficial for many countries.
In addition, oil purchase from higher priced states might remain possible if the tax rate was variable dependent upon source price.
I think there is no chance of such a tax right now. Its design would be controversial. But I float the idea: it may be something whose time will come much quicker than people expect if oil prices stay down.
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I can’t fault the economic case: if OPEC choose to forgo the economic rent on petroleum, governments can and should pick it up.
The problem is letting go of it again when crude prices rise.
Err… why not let the economic surplus go to consumers?
Because oil use has massive externalities
Tax is frequently needed to correct them
Just look all around you
To put it another way – markets get things very wrong
When petrol and diesel are already taxed at, I believe, over 70%, it is unpalatable to think of increasing this tax further. It is interesting though, to note that in UK filling stations, a litre of petrol is still often cheaper than a litre bottle of drinking water.
In order to stabilize our fuel costs it may be possible to set up a reservoir or suspense account and fill this with tax when the price is low and use it to subsidize the price when it rises through reasons beyond our control. The question is though, would this fund be used for other purposes? To some degree, hedge funds and derivatives traders already do this.
I quite clearly see this as a price adjustment mechanism
I think the FT needs to read more:
“Saudi Arabia is trying to discourage the use of Iranian and Russian oil revenues to prop up the blood-stained and beleaguered Assad regime in Damascus, to finance Iran’s nuclear military program, and to incite the continuing outrages of Hezbollah and Hamas in Lebanon and the Palestinian Territories against Israel”
“The oil-price weapon, in the face of the terminal enfeeblement of the Obama administration, is the last recourse before the Saudis and Turks, whatever their autocues of racist rhetoric, invite Israel to smash the Iranian nuclear program from the air”
http://fullcomment.nationalpost.com/2014/12/20/conrad-black-the-saudis-believe-the-the-west-is-about-to-give-in-to-iranian-demands-crashing-the-price-of-oil-is-how-it-fights-back/
Is demand for oil that elastic in relation to price that demand will increase if the price falls? I think not. You are also assuming that producers would lift at $20/bbl – if the cost of extraction exceeds $20/bbl, the oil will stay in the ground…
“I think there is no chance of such a tax right now. Its design would be controversial” – well yes, if it can be designed to achieve the intended effect (and notice you do not proffer a inkling of a framework)
If you want a carbon tax – have one, but not based on something as mercurial as the oil price – cf. fuel duty escalator…
Break-even costs of most oil/gas production.
Save and expand to read.
Most Mid East is still producing at reduced profit, but no loss.
http://tinypic.com/r/k9z12d/8
Note that most people are also unaware of the implications contained within the climate change act. That is that #all# means of energy consumption shall be electric within 30 years.
With another EU directive wandering along around 2017 ending FITs’, things will certainly get interesting in the renewables market.
Another interesting read, for those of an engineering/investment inclination:
http://www.finadvice.ch/files/germany_lessonslearned_final_071014.pdf
I think a carbon fee and dividend approach is the way to go, paid directly and transparently to the public rather than collected by governments.
The oil price won’t stay low for long. There is a limit to oil supply rates, and Saud is reaching that limit. Other producers cannot sustain low-price production at all. Trying to close US producers is also a short-term affair, they can close wells and re-open as needed. I think the price will stabilise at around £80/Br early next year.
There are more problems arriving, globally, that will cause the price of oil to seem irrelevant.
A recent G20 decision seems to have been under-reported, by almost everyone:
“At the recent G20 meeting the nations agreed that bank deposits would no longer be considered money. These bank deposits become the property of the banking institution and as such can be used any way the bank wants”
So not much will remain to pay depositors, after the valueless derivatives etc have been paid off out of what money there is.
Coming soon to a country near you, disaster at the hands of a $300 trillion gamble. Still, those responsible will have moved their [cash] assets into more solid investments, such as London Property, gold, art and [probably] drugs. Money has no morals.
That’s always been true of bank deposits though…..
Twas’ two days before Christmas, and all through the Fed,
The minions were cheering,”Volatility is dead”.
Portfolios were leveraged, with nary a care,
With assurances that liquidity, would always be there.
The indices climbed to new record heights,
With visions of higher; the Fed you don’t fight.
My terminals blinking, and I at my desk,
I’d finally conceded, there was no more risk.
When in emerging markets there arose such a clatter,
I sprang from my seat to see what was the matter.
Away to the Bloomberg, I flew like a flash,
Reviewed all the headlines and began to raise cash.
Europe was crashing, with Japan in more trouble,
China was slowing, and our markets a bubble.
When what to the pandering press should appear,
Soothing words from the Fed, and again markets cheered.
The algos u-turned, there’d be no more sellin’,
I knew in an instant it must be Janet Yellen.
More rapid than eagles, her policies they came,
And she whistled and shouted and called them by name.
On stimulus, on TARP, on QEs 1, 2 and 3,
On Abenomics, on LTROs, the money is free.
$13TR and counting, we’ll print ’til we die.
Prosperity from nothing, it’s as easy as pie.
And then came the punchline, they’d found a new fix.
The Fed was preparing QEs 4, 5 and 6!
I often have asked, just how high is high.
I no longer question, I know to just buy.
The chairwoman smiled, a right jolly old elf.
The con worked again, she was proud of herself.
Fundamentals don’t count, only faith in the Fed.
Investors the world over have nothing to dread.
A world drowning in debt, weighed down with deflation,
Was saved once again by more asset inflation.
And I heard her exclaim, as she cranked up her press,
Wish your kids Merry Christmas, they’ll inherit this mess!
http://www.zerohedge.com/news/2014-12-23/stocks-surge-record-est-highs-bond-bloodbath-ensues#comment-5586119
I thought I’d throw that in!
Merry Christmas, and a prosperous and highly-leveraged New Year!
Amused
But I don’t but it
This is not debt
It is money
And it’s time we said so