Another oil price shock – Low carbon boost or economic tragedy?

As if the current credit crunch, recession, political instability and climate change aren’t enough to worry about, anyone who scours enough media sources will spot a growing concern in the background – that this year will see another oil price hike similar to last year but more sustained.

Is an oil price surge the kick we need to get to a low carbon economy, or a major risk to our economic security?

Last year, oil price hit $147 a barrel, from around $30 a barrel from 2000 to 2004. It’s currently back below $100 but on the rise – 2 days ago it passed $70 a barrel again. Goldman Sachs reckon it will be $95 next year, and some think this is optimistically low. The reasoning is simple – demand is growing as economies are trying to rev up again, in particular China. And in the background are worries that we have passed what is called ‘oil peak’ – that production can only decline from here as all the ‘easy access’ oil has been extracted already, and there’s less and less to find.

What does all this mean for consumers and business?

Read on for my simple summary as I understand it:

– Oil price sits behind everything, as we use fuel in all raw material extraction, agriculture, manufacturing, transport, energy provision etc.

– The way we have developed our shopping, living, working habits over the last 40 years have been shaped by cheap oil

– If oil is expensive, consumers will first feel the impact on grain prices, meat prices, and energy prices, including fuel price at the pump and home electricity bills.

– All sectors including manufactured products would take a cost increase, and can either pass on to consumers, if they are able, or take a profitability hit.

– The longer a higher oil price sustains, the more it will change the decisions industry makes: for example, investment in wind energy and more efficient aircraft become more viable above about $100 a barrel.

– High energy prices would influence consumer purchase decisions, effectively putting a ‘carbon price’ on high-carbon (high-oil) items: including energy hungry plasma TVs, low efficiency white goods, poorly insulated houses, and plastic/steel based consumer products & packaging.

– If this was the end of cheap oil, then it would drastically change the economy – creating an urgent need to shift to less fossil fuel dependance, decarbonise our energy grid, and reduce waste and complexity in supply chains of all products….

– And it could create a real impetus for ‘low carbon innovation’ across all sectors, as businesses rethink our goods and services to minimise the oil price impact.

– But the political fall out would be considerable: even more power to the oil producing nations, more dependance on gas from Russia, the exploitation of highly carbon intensive (ie bad) oil tar sands such as in Alaska, the pressure to drill for oil in conservation areas (eg Alaska again)…. and even more difficulty managing an economy back into growth.

So what do you think? Are there any better solutions? Can we insulate ourselves against a price hike that shocks all our supply chains and puts pressure on food and energy? Or should we welcome high oil prices as the driver towards a low carbon economy?