The five-year average oil price has entered triple digits for the first time. The occasion didn’t receive as much publicity as crude’s first trade above $100 a barrel in early 2008. But the rise in the long-term price of Brent, the main world benchmark, is arguably a more significant milestone for the global economy.
Six years ago, former U.S. Secretary of State Henry Kissinger and economist Martin Feldstein warned in the New York Times that the tripling of oil prices from 2001 to 2008 represented the “largest transfer of wealth in human history.” They fretted that prolonged high prices would cut living standards, create an unfavorable balance of payments and stoke inflation in advanced economies, foment political unrest in poor countries, and give petrostates undue political influence.
Yet despite persistent $100 crude, global GDP growth has ticked along at a rate of 2 percent to 4 percent annually since 2010. While subdued by pre-crisis standards, that’s hardly 1970s-style stagflation. Indeed, the long period of high prices has brought some clear benefits.
For one thing, it has given U.S. oil and gas producers the assurance they needed to ramp up investment in hydraulic fracturing. Prolific shale drilling at a breakeven price of $60 to $80 per barrel has unlocked huge new supplies of domestic natural gas and oil. That in turn has given U.S. manufacturers an energy-cost advantage, especially in plentiful home-produced natural gas, and generated interest in the potential for gas to substitute for oil as a transport fuel.
Eventually, the shale boom may turn the United States into a net oil exporter, further reducing reliance on volatile regions like the Middle East, where oil sales sometimes help fund regimes that aren’t friendly to western interests. Taking a cue from the U.S. success, wannabe fracking powers China, Argentina and Russia are trying to develop their own vast shale reserves.
Meanwhile, the unsubsidized cost of solar power systems has plunged by more than three-quarters in six years as investors – including China, now the world’s largest net importer of petroleum – have pumped money into the industry. That has not only transformed solar from a costly curiosity into a competitive energy source, helping to smooth Germany’s shift away from nuclear power after the 2011 Fukushima disaster, for example. It has also created jobs. A recent survey by the Solar Foundation, an industry group, found that more than 140,000 Americans were employed in the solar sector last year, up nearly 20 percent from the year before.
Consumers, companies, and even politicians have started paying closer attention to energy efficiency and renewable energy options. Stung by higher gasoline bills, some Americans have fallen in love with the Toyota Prius and Tesla Motors’ electric cars, and out of love with gas-guzzling SUVs.
They are also driving less. Breakingviews calculations based on Department of Transportation data show the average number of miles driven each year by over-16s in the United States has dipped 9 percent since 2005 – a big shift for a car-obsessed country.
And after barely budging for nearly two decades, the amount of energy consumed per dollar of U.S. GDP has fallen 10 percent since 2007, according to Energy Information Administration figures. The International Energy Agency has estimated that investments in efficiency could cut global oil consumption by up to 13 million barrels per day by 2035 – about equal to the current combined crude output of Russia and Norway, or about 14 percent of today’s oil demand.
Moreover, throughout the last five years inflation has been subdued while labor productivity has improved, if sluggishly.
Kissinger et al weren’t completely wrong. Five years of relatively expensive fuel have probably slowed global growth somewhat. Wealth has also shifted from petroleum importers to exporters, and high oil prices have flooded markets with potentially distorting petrodollars. That effect could, in theory, help explain everything from Qatar’s successful 2022 World Cup bid to Russia’s recent assertiveness in Syria and Ukraine.
Still, the fact that the global economy has carried on growing during half a decade under what might once have been considered a crippling constraint suggests the cheap energy of yore was often squandered. Pricier crude, by contrast, has fostered greater discipline and spurred innovation.
The lesson shouldn’t be lost on policymakers weighing action to slow greenhouse gas emissions. If the global economy can handle half a decade of $100 crude without going off the rails, it could probably handle the gradual introduction of a carbon tax, too.