Is the drop in oil prices a temporary phenomenon resulting from exceptional political circumstances and a depressed global growth or, conversely, does it prefigure a sustainable return to cheap fossil fuels ? The second hypothesis appears more likely. The causes of the current collapse are identified. The producing countries gathered in OPEC had to face higher supply in a less favourable economic context. They could not agree with each other in order to support prices.
The United States had clearly opted for lower oil prices: this strategy amplifies the impact of economic sanctions to force Moscow to give up its territorial and political ambitions in Ukraine. This strategy is effective because it is trying to weaken the Russian economy, as well as that of its neighbours and allies who suffer, in turn, similar consequences. But this situation is by nature temporary. When tensions arising from the crisis in Ukraine fall down, the United States will return to their traditional doctrine. Expensive oil is in the interest of the United States, even more since the oil deposits that have been operated with new techniques have higher costs than their traditional oil deposits.
The US strategy would not have had the same effectiveness if they were isolated. The oil prices have fallen sharply also because Saudi Arabia has not compensated the current market imbalance by reducing its production, as it used to do within OPEC. The reason is well known. The Kingdom wants to weaken Iran, with which relations go through a serious and lasting crisis due to the confrontation of their respective conceptions of Islam. The country now publicly states that its national or religious imperatives outweigh its past role as defender of oil producers and leader of OPEC. The latest statements from the Saudi oil minister Ali al-Naimi are unambiguous: "it makes no sense for the countries of OPEC to cut production, even if this results in a drop in prices up to $40 or $20 per barrel.” Around the Persian Gulf, people wonder why they should reduce their production to benefit US, Brazilian or Canadian competitors. These statements mean the end of OPEC, since its role so far, like all cartels, was precisely to control prices in the interests of its members.
A new phase has opened up. Sooner or later, relations with Russia will calm down. The United States will be interested again in rising prices in order to support companies that have engaged in the shale oil exploitation - sometimes by borrowing heavily - or to support industries and services that live on exploration and oil exploitation. But this will not be enough if the United States does not coordinate with Saudi Arabia and its former allies, yet they have refused to collaborate with them. Current fall should not be a parenthesis. Moreover, the barrel of oil has only recently exceeded the threshold of $ 100. Two oil shocks occurred: the first one brings the barrel of oil up to $ 10 in 1974. Until then, it was worth $1 or $2, depending on locations. Then in 1979, prices rose to $ 30 and remained around this level until 1984. Then, for almost 20 years and until 2004, a barrel of oil would cost less than 28 $. Prices fell again in 1998, reaching $ 12. Exporting countries have made do with it.
The soaring prices that started in 2005 made the barrel reached $ 140 during the summer of 2008, at the peak of speculation. It was a third oil shock and was part of the "super-cycle raw materials "caused by the rapid growth of emerging countries and past sluggish exploration efforts. Supply was then sufficient, so why launching expensive projects? Things changed in 2006 with the stock exchange price rise. In addition to the US oil shale deposits, giant deposits were discovered in Brazil and Africa. OPEC and the United States were successful, at first to somehow maintain the market price above $100. But the way people interpreted this evolution, especially in France, was totally different. They thought that the oil price rise was the sign of an imminent exhaustion of resources. A quick look at the comments made during the deliberations of the Grenelle de l’Environnement in 2007 and the environmental Conference in 2013 would prove that this analysis prevailed among most of the political leaders and was not only supported by the Greens, inherently hostile to “non-renewable” sources of energy. Since the indisputable imperative to reduce greenhouse gas emissions implied to reduce fossil fuel use, higher prices contributed to the achievement of environmental objectives. This entire intellectual edifice is wobbling today.
The United States continues to increase their production but the Gulf countries are now refusing to reduce it and OPEC has fallen out of the game. Stock exchanges collapse. This tendency has been amplified by the reversal of speculative positioning. Beyond geopolitical considerations, this situation is sustainable because it corresponds to the new state of the oil market. One could say the same about natural gas due to contract indexation. What are the consequences for French economy if the barrel price remains around 40$ over the next decade? In the short term, this is excellent news. The energy bill will be halved, saving about 30 billion euros for the coming years, and increasing thereby the household’s purchasing power by reducing oil transport and heating bills. Business costs will decline throughout Europe. Our trade deficit will also be halved and our current account balance will be in equilibrium again - for the first time since 2004.
But this "good news" will make the "energy transition" bill, currently discussed at the Parliament, way more complicated to implement. The stated objectives to reduce energy consumption and to develop renewable energy are already very ambitious and they will become almost impossible to achieve. The State will have to face a difficult dilemma: Either it allows the repercussions of lower energy prices on the economy in order to support short-term activity. But the investments initially planned to reduce our consumption and to feed the “green growth” will not happen. Major public subsidies were already needed to trigger consumers’ decisions. Indeed, if heating oil prices halve and gas prices decrease by at least 20%, who would be willing to start construction work? If gasoline and diesel fuel prices also drop by 20%, who would be willing to buy an electric car? As for renewable energies, whose production peaks coincide with low demand points and which already need substantial subsidies paid by consumers to balance their accounts, how are we going to justify the fact that their share in the electricity mix will be increased according to the plan? Or the State decides to increase its taxes on fuels, gas and electricity prices, in order to compensate for oil prices fall and resolves to invest the proceeds in green growth. This would mean choosing consistency.