Among the unforeseen (by me, at any rate) events of 2014, the collapse in the price of crude oil may be among the most significant. Prices have fallen from more than $100/barrel in mid-2014 to around $60/barrel today. This follows a more gradual fall in the price of coal. The thermal coal price peaked at $140/tonne in 2011 and has now fallen to around $70/tonne. Prices for metallurgical coal and iron ore have also collapsed.
What should we make of this? The big questions are
(i) to what extent does the price collapse reflect weak demand and to what extent growing supply
(ii) will these low prices be sustained, and if so, what will be the outcome.
The answer to the first question seems to be, a mixture of the two, with some complicated lags. Strong demand growth (briefly interrupted by the GFC) produced high prices which made new projects appear profitable. Now the projects are coming on stream, but demand has weakened. Since both demand and supply are inelastic (not very responsive to prices) in the short run, a moderate oversupply produces a big drop in prices.
Coming to the second point, if we are to reduce emissions of CO2, a necessary precondition is that the price of fossil fuels should fall to the point where it is uneconomic to extract them. Current prices are below the level at which most new oil and coal projects are profitable, so, if they are sustained, we can expected to see a lot of project cancellations and closures (this is already happening with coal to some extent).
The big question is whether sustained low prices will lead to a recovery in demand. There are at least some reasons to hope that it won’t. There’s pressure to reduce coal and oil use coming from many directions, so, even at lower prices, I doubt that we will see a surge in investment in new coal-fired power plants* or a return to oil for uses like heating.
So, the hopeful scenario is one in which the abandonment of new projects brings us the long-awaited advent of Peak (or rather Plateau) Oil and Coal** in the not-too-distant future, giving time for policy to push the global economy in the direction of decarbonization.
* Someone will doubtless point to the case of Germany. But as far as I can tell, the plants that have opened recently were commissioned around 2006, and most proposals made since then have been abandoned.
** Of course, gas is a different story, partly because there is no global market. Gas prices are rising in some places (Australia, for example) and falling in others as trade expands.