Where does the oil price crash leave the Paris agreement?

It feels like we’ll soon be drowning in oil. Oil isn’t just getting cheaper by the day. The price is positively crashing. And in it’s downward spiral this price crash looks like it may sap the willpower of politicians and business leaders to stick to the spirit of the recent Paris agreement.

But why and how is all this happening? To me it looks like the current turmoil is masking a new kind of economic warfare that is raging across the globe. With new and emerging powers trying to impose their will – at any price.  But the list of players is long and complex.

Keeping it simple, we could say the price crash started when the Saudis started increasing oil production, driving prices down. Why? Probably to cause massive problems for the upstart fracking and shale oil industry, as it is now costing them more to extract the oil and gas than they can sell it for. Watch them slowly go out of business. This smells very much like an outright attempt to crush the  competition by destroying their financial viability.

And then the are the Russians. I suspect that this price drop is also designed to drive them to the negotiation table about Ukraine and Syria (which is probably why our Governments have been so meek and silent about the atrocities being committed by the Saudi forces and their allies in Yemen). Except, the Russians appear to have turned the tables and started pumping yet more oil to compensate for their loss of earnings – driving prices down even further.

This is causing a bit of a blowback on the Saudis. Oil prices that are too low for too long will hurt them in the long run just as much. Who will blink first?

And then there is China. Their command economy is on course for a serious correction. Nearly 10% growth every year for decades can’t happen without some massive distortions in the economy – no matter how much you ‘command’ and throw money at the problem. (If you need an example: there are whole ghost cities that have been built in China – that nobody will live in).

A Chinese recession in itself will happen at some point, that is for sure. There will always be boom or bust. As much as politicians think they can magic them away (remember Gordon Brown’s promise?). But what will the consequences be? Well, political unrest, that is certain. From Tibet and the Islamic outlier regions to the urbanite jobless, people will have something to say about the central government.

But more significantly for all other economies around the globe, it may also cause a massive reduction in oil consumption. With oil already being in a downward spiral, a drop in oil consumption by the world’s second largest economy would surely result in a glut, compounding our economic problems even further.

The current cheap oil prices are the fall-out from an economic war that has ‘gone wrong’. Much like the generals in WWI found out, once you get stuck in trench warfare, there is no easy way out of the mess.

This doesn’t however mean that oil prices will forever remain low. Indeed, eventually the oil producers will pull back from the edge of their self-made abyss and come to an agreement, curbing production – and raising prices. In the end, prices do have to rise, as extraction cost keep mounting while oil resources get harder to extract. This may be a decade down the road, but it will happen, for sure.

Which is why, even though we’re temporarily benefitting from reduced oil prices, we shouldn’t lose focus and abandon the Paris agreement. It certainly is the best framework we currently have to work with. Hopefully our political and business leaders have enough vision to see that the pursuit of sustainability is the only real way forward and will maintain course. In fact, the low oil prices may even be helping the process along, as reduced prices help bring down production costs for the manufacture of renewable energy sources. So when the time comes and prices soar again, we’ll be prepared and have a well developed sustainable industry base.


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