Oil Is Cheap

Those of us for whom sustainability has been a focus (or even preoccupation) think constantly about how the environment supports us and how societies need the wherewithal to attend to the environment. But let’s consider one of today’s important economic news stories from the point of view of those whose habit it is to regard economics in very hard, pragmatic, and even narrowly economic terms. 

Oil is cheap. Against that salient—and at this point, preoccupying—reality, is there any real point in talking about getting portable, liquid fuels in an alternative way? Our global market economy does not really recognize the externalized negative effects of emitting carbon such as global warming and climate change. Because the market does not directly see the costs of such externalities, nothing really happens to account for such costs: We (mostly) have no price on it. We don't (very much) limit it. We don't penalize emitting carbon. The market is therefore blind to it. Except for the fact that some people or companies recognize an intrinsic value in doing things in a better way, 'oil is cheap' will drive all of the decisions about buying fuel, except ...

There are two other factors that are also playing—though outside of the very narrow, raw, current price consideration: security of supply and stability of price. The former is pretty straightforward. Remember the joke about buying hamburger: You ask the butcher about the price of hamburger and she tells you that it is five bucks a pound. You say that the store up the street sells it at four bucks. She says, "So, buy it up the street." You reply that the other store doesn't have any hamburger today. The butcher says, "When we don't have any hamburger it's only three bucks!" For emerging and developed economies, being certain about supplies of liquid energy are massive concerns—not only from the point of view of their economies but also in terms of national security.

The second factor, the advantage of price stability, is less obvious. Suppose you were considering buying a new piece of factory equipment for $100M. Expensive. But that machine can make you money; you can sell finished product at a unit price of $10 and that provides a modest profit; the investment is worth it. Now, let's say that the main costs in operating the machine are labour, raw materials, and electrical energy. If there is one cost component, say, raw materials, that is wildly variable, it is very risky to buy the machine. You must either forgo the opportunity to make any money or hedge against raw materials costs and make less money. If the margins are too narrow, there is no deal. And even if hedging makes the deal possible, there is still a cost: it will be a help if materials prices soar but, likewise, you won't be able to capture all of the benefit when they drop.

Oil is cheap. And as we sit here watching raw and refined product inventories grow, we can expect that it may get quite a bit cheaper. This is macro, macro stuff; what is the cost to the global economy of such excursions in the price of a key energy commodity? How is all of this affecting global economic growth and the economic productivity of our aggregate capital asset base?

No matter how cheap oil gets, I still want something else. Sustainability is all about the capacity, in physical, environmental, human, and economic terms, of carrying on. Oil does not assist in any way with all of those concerns. Oil that swings from $10/bbl, to $60, to $20, to $140, to $50, to $120, and now to less than $50/bbl in real terms, and in the space of a few decades is not in any way helping the world economy be or become sustainable.