Oil prices are on the rise again as parts of the global economy starts to shift back into the growth zone. What appears to be going on, behind the scenes, is rather more interesting than just the headline numbers.
The situation looks broadly like this. Among many energy experts the general view prevails that if prices are enduring above US$100 per barrel then they are likely to stimulate a collapse in demand, possible recession in the major consuming countries, and an accelerated search for conservation or replacement technologies.
The pre-crisis peak in 2008 was about US$150 (driven there in part by commodity speculators), but it subsided rapidly as more supply was made available, and as many economies entered recession.
people (or indeed nations) are unable to adjust their consumption patterns as fast as prices can change, and this could easily lead to short-term economic privation
However, there is also a view that prices will become more volatile and unpredictable in a situation where demand and supply are closely aligned, or indeed when global oil production starts to fall. Unfortunately, people (or indeed nations) are unable to adjust their consumption patterns as fast as prices can change, and this could easily lead to short-term economic privation.
Petroleum prices are among the most politicized and manipulated of all commodities, not least of course by OPEC. National governments also are torn between the long-term goal of reducing petroleum dependency and reaching carbon emission reduction targets, and the short-term imperative to insulate citizens from the inevitable financial costs such a strategy is likely to require. Countries where the final price of petrol or diesel carries a higher proportion of tax are somewhat more insulated from spot-market price rises than those that do not.
Hence, it is no surprise that OPEC feels comfortable with an oil price in the region of US$70-80 per barrel. This is comfortably profitable, but not such a high price that the search for alternatives becomes absolutely compelling. Moreover, OPEC has reportedly promised that should prices rise above the magic US$100 threshold, then supply would be stepped up to counteract the pressure of growing demand.
Ironically, attempts to reduce the consumption of oil could act to reduce prices, and thereby reduce the incentive to switch to other sources of energy
Under the OPEC dream scenario, attempts to reduce oil consumption in the mature economies would be counteracted by burgeoning consumption in the newly industrializing economies, and this process would be dragged out over a very long time indeed. Thus far, the evidence suggests that the growth in consumption in some key economies such as China and India is outstripping the reduction in consumption in the more mature economies.
Where does this leave the electric vehicles industry? As ever, the prospects for the industry appear tied to petroleum prices, at least for the short term. Rather than lobbying for government R&D money or subsidies for consumers to buy EVs, stakeholders may be better advised to focus their lobbying efforts on increasing fuel prices to consumers. Ironically, attempts to reduce the consumption of oil could act to reduce prices, and thereby reduce the incentive to switch to other sources of energy. Hence it is vital for the EV industry that high oil prices be maintained even if spot-market prices are lower.
Dr Peter Wells is a Reader at Cardiff Business School, where he is a Co-Director of the Centre for Automotive Industry Research and leads the automotive industry research programme within BRASS, also in Cardiff University. Dr Wells is also a director of AutomotiveWorld.com’s sister website AWPresenter.com. He can be contacted on firstname.lastname@example.org.
Ms S Morreau is a researcher based in Cardiff.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.