Oil Prices and the New Climate Economy

This note addresses some of these issues, building on the findings and recommendations of Better Growth,Better Climate: The New Climate Economy Report, published last September by the Global Commission on the Economy and Climate. The report found there were many actions countries could take to promote better growth, while also reducing GHG emissions from energy use. The overall conclusion of this note is that opportunities for structural change in economies and energy systems remain even with a situation of lower oil prices.

Low oil prices offer welcome short-term economic relief for consumers, but medium- and long-term prices remain uncertain. Energy price volatility is high and hurts economic growth. Overall, cheaper oil provides a stimulus to the world economy, but with uneven effects, and countries cannot bank on future low fossil fuel prices. Even now, forecasts for the next five years vary between troughs as low as 20 USD/barrel, to a steady return to 100 USD/barrel levels. The uncertainty and volatility hurt the economy.

Still, low oil prices offer an opportunity: countries can seize the day to improve energy pricing and reform subsidies to achieve long-term benefits. Distorted energy prices stand in the way of a better growth and development path for many countries, and lower oil prices offer an opportunity to correct course.

Despite low oil prices now, there are good reasons to continue to expand investments in renewable energy for electricity production. A long-term focus still favours steps to reduce dependence on fossil fuels (which would also reduce GHG emissions), but decision-makers need to take a fresh look at their options and recognise the changes in the landscape. Cheaper oil does not compete directly with renewable energy for electricity production, but can bring lower natural gas and coal prices, with wider impacts. At the same time, costs of renewable energy are falling and have low volatility, making these sources of energy an attractive option regardless of short-term oil price movements.

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