from Energy, Security, and Climate and Energy Security and Climate Change Program

Politics and Policy Still Critically Shape Oil Markets and Prices

Gasoline pump prices 2015 gas tax

January 20, 2015

Gasoline pump prices 2015 gas tax
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Where will oil prices ultimately shake out? I argue in an FT op-ed today that political dynamics sparked by falling prices will be as important as purely economic forces in determining the answer:

“The assumption that politics, whether Saudi manipulation or collusion in the OPEC oil producers’ cartel, would keep prices eternally above $100 a barrel was proved wrong [by the oil price crash]. Now people are flipping to an opposite view, where market forces are king and politics no longer matters. Instead of reading the tea leaves in Riyadh and Vienna, they are focusing narrowly on how commodities and capital markets will adjust to low prices — which in isolation is just as wrong and just as dangerous.”

The piece works through potential supply-side policy shifts by both low- and high-costs producers and possible demand-side changes too. Each is worth an extensive analysis in its own right, and none have been getting serious treatment by analysts so far. This is a largely understandable short-term reflex – it is right to believe that markets, not energy policy, are now central to shaping oil prices in the short-run. But it is the wrong way to look at long-run responses to lower oil prices.

The piece doesn’t talk about “geopolitics” in the traditional market-analyst sense –upheaval in Nigeria or Venezuela, macroeconomic policy in Europe, and such. There’s no debate that such things will always influence prices. What’s essential to remember is that, OPEC or no OPEC, policies that might shift directly in response to lower oil prices still matter.

You can read the whole piece here.

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