Oil, Prices, and Global Impact

Call it the fall heard round the world.

The dramatic decline in oil prices—from over $100 a barrel in 2014 to below $30 this year—has been one of the most disruptive and least expected developments in global energy markets since the 2008 financial crisis.

In 2012, Belfer Center energy expert Leonardo Maugeri was one of the few who saw it coming. His paper, “Oil: The Next Revolution,” boldly predicted today’s oil glut. His latest report, published in February, sees continued downward pressure on prices for years to come.

Continued low prices would have major implications on everything from Saudi and Russian foreign policy to energy development in China and emissions reduction goals in the United States. We asked Belfer Center scholars to weigh in on some of the consequences of this macro trend.

With the continuation of high oil production and low prices, the Belfer Center’s Khalid Alsweilem, Calestous Juma, David Keith, Henry Lee, Leonardo Maugeri, Meghan O’Sullivan, and Robert Stavins offer insights, predictions, and recommendations based on their research and varied perspectives.

Production capacity and supply will continue to grow

—Leonardo Maugeri, Senior Fellow, Geopolitics of Energy Project
(from “The Global Oil Market: No Safe Haven for Prices”
Belfer Center report, February 2016.)

“Despite the decline in price, actual production of oil seemed to defy the laws of gravity and economics as it continued to grow. Many [companies and countries] are just beginning to register production from recently completed investments, while others are completing their investments, after having spent the bulk of their capital budgets. The result: production capacity and the supply of oil will continue to grow.”

Saudi Arabia could lose its oil revenue savings

—Khalid Alsweilem, Non-resident Fellow, Belfer Center (from "A Stable and Efficient Fiscal Framework for Saudi Arabia," Belfer Center/Center for International Development report, 2015.)

“Over the medium term, the much-debated prospect that the fall in oil prices may not be short-lived, but rather herald a new low oil-price corridor for a number of years, will put the Kingdom’s savings from earlier oil revenue booms at risk of depletion.”

Bad news for emission control; good time to phase out subsidies

—Robert Stavins, Director, Harvard Project on Climate Agreements

“The bad news is that low gasoline prices have short-term effects in the form of more driving and fuel use by the existing fleet of motor vehicles, which is bad news in terms of emissions (and congestion). The good news is that they present an opportunity for new, sensible energy and climate change policies. Now is the time to reduce—or better yet, phase out—costly and inefficient fuel subsidies. And there has never been a better time to introduce progressive climate policies in the form of carbon-pricing, whether via carbon taxes or through carbon cap-and-trade.”

New energy technologies will help African sustainability

—Calestous Juma, Director, Science, Technology, and Globalization Project

“Exponential advancement in renewable energy and lighting technologies—especially solar and light-emitting diodes (LEDs)—offer Africa new opportunities for technological leapfrogging. These and related energy sources such as wind power are already starting to shape new development pathways for Africa that are more sustainable and decentralized. There is a real chance that these technologies will do for sections of Africa’s energy sector what mobile phones did for telecommunications.”

China’s emissions cuts depend on reducing manufacturing focus

Henry Lee, Director, Environment and Natural Resources Program

“President Xi Jinping’s commitment to lower China’s growth in carbon emissions along with its emissions of conventional air pollutants, such as particulates, sulfur and nitrogen oxides, is intrinsically linked to China’s transformation from a manufacturing-intensive economy to one characterized by greater reliance on services. The success or failure of this effort will be determined more by the programmatic initiatives at the provincial level than what happens in Beijing. Challenges will include adjusting the promotion incentives for local officials, building capacity to monitor and enforce programs, and changing the institutional relationship between state-owned enterprises and local officials.”

Oil-focused countries are facing acute crises

—Meghan O'Sullivan, Director, Geopolitics of Energy Project

“The most acute crises are unfolding in the populous oil producing countries that failed to take advantage of the “fat” years to diversify their economies. Venezuela, Nigeria, and Russia top the list, but if low oil prices persist for a few years, Saudi Arabia could have real problems as well. China is likely the biggest “winner,” as low energy prices give a much needed boost to its energy-intensive economy and help keep down inflation. While gradual changes in supply and demand are the most likely candidates to eventually balance the market, more political unrest in big producers—or cooperation among them—could make this moment come more quickly than otherwise expected.”

Cheap fuel reduces demand for low-carbon options

—­David Keith, Professor of Public Policy, Harvard Kennedy School

“Cheap fossil fuel makes it harder for low-carbon options to compete—economics can’t be wished away. In the electricity sector, cheap gas is a win when it helps shut down coal, but it’s a big loss when it helps shut down existing nuclear or slows growth of solar. Sensible policy would give existing nuclear the benefits solar and wind get, helping to keep it in the mix.”