Oil Market Volatility Threatens Global Economy In The Long Run, Economists Warn

The sharp decline in oil prices over the last year has broadly benefited global consumers, who have more money to spend on everything else besides energy. But sudden and sharp price swings also are making the oil market more volatile, which threatens to delay business investment, slow job growth and, eventually, crimp consumer spending, a team of economists warns.

Brent crude, the global benchmark, and U.S. crude both plunged by about half by December after reaching peaks of $112 a barrel and $105 a barrel, respectively, in June 2014. Prices have since recovered somewhat from five-year lows -- to about $65 a barrel for Brent and $60 a barrel for U.S. crude -- but they aren’t expected to see triple digits again for the foreseeable future.

In a report published Tuesday by the Global Commission on the Economy and Climate, an international initiative led by former Mexican President Felipe Calderón, economists urged global policymakers to scrap subsidies for oil and other fossil fuels and instead invest heavily in renewables, which are becoming steadily cheaper and less volatile as energy sources.

“If you compare something that is trending down strongly and something that is bouncing around, you should definitely go for the former,” the report’s co-author Lord Nicholas Stern, a former British Treasury official and prominent climate change economist, told the Wall Street Journal from London. “When oil prices fall, it is a wise time to change...and that will also help protect us against energy price volatility in the future.”

The world guzzles about 90 million barrels of oil per day, so a price of $60 a barrel, instead of $100 a barrel, would save consumers around $1.3 trillion per year in energy costs, the report found. While price drops are harmful to oil producers, which have been forced to slash thousands of jobs and trim their capital budgets, the net effect on the economy is positive in the near term. If prices remain low, global gross domestic product is expected to be 0.3 percent to 0.7 percent higher in 2015 than it would be otherwise, the International Monetary Fund has estimated.

But oil prices are often unpredictable. Even analysts whose job it is to forecast prices say the task is an imprecise science and prone to miscalculation. While the market value of oil is about 5 percent of world GDP, prices can move by 50 percent within a matter of months, quickly ratcheting up the cost of manufacturing, transportation, food production and electricity when they rise, and conversely shriveling the demand for pipelines, metal and steel for oil production and shrinking tax revenues to governments.

“There are few short-term options to reduce consumption, and it has widespread knock-on effects on other key inputs to economic activity,” Stern and his co-authors wrote in the report. “Energy price volatility is therefore a major concern.”

The report urges governments to use the current period of cheap oil to reduce their dependency on oil and reform subsidies for fossil fuel production, which totaled $550 billion in 2013. The economists noted that renewable energy sources, including solar and wind power, have little or no operating cost after installation -- enabling developers and electric utilities to lock in energy prices for 20 years or longer. Wind and solar prices have plunged in recent years as the technologies improve and developers become more efficient at installing and financing turbines and panels.

“Few countries have energy prices that fully reflect the harm of pollution to public health and the environment, while most also lack the carbon prices that can underpin structural change towards a lower-carbon economy,” the report stated. “Whether oil prices are high or low, there are benefits from correcting these various deficiencies.”