World Bank urges leaders to use oil crash to slash subsidies

As oil price hits 5-year low, chief economist warns emissions could rise without government leadership

(Pic: Shell/Flickr)

(Pic: Shell/Flickr)

By Ed King

Governments should slash oil subsidies as the global price plummets or face a longer term rise in demand and global carbon emissions.

That is the stark warning from the World Bank in its Global Economic Prospects for 2015 publication, released on Wednesday.

“If sustained over the medium-term, low oil prices may encourage a move towards production which is more intensive in fossil fuels or energy more generally,” it says.

“This runs counter to broader environmental goals in many countries.”

Oil plunged below the US$50 per barrel mark on Tuesday, its lowest price since 2009.

The drop has been linked to a marked increase in production from the US, coupled with sluggish economic growth in China and the EU.

(Pic: World Bank)

(Pic: World Bank)

With Russia and the Saudi Arabia-dominated OPEC cartel refusing to cut production, the signs are prices will remain low.

World Bank chief economist Kaushik Basu said governments should use this drop in prices to offset the medium-term incentives for increased oil consumption by changing tax policies on energy use.

“With oil likely to remain cheap for some time, oil-importing countries should lower or even eliminate fuel subsidies and rebuild the fiscal space needed to carry out future stimulus efforts,” he said.

Earlier this week former US Treasury secretary Larry Summers said Washington should take advantage of the price slump and place a price on carbon.

“A tax of $25 a ton would raise well over $100bn each year and seems a reasonable starting point,” he wrote in the Financial Times.

Severin Fischer, an energy analyst at the Berlin-based SWP thinktank told RTCC EU leaders should use the extra funds available to target energy efficiency measures.

“Low prices offer economic room to manoeuvre. There is a window of opportunity to invest in efficiency, especially in transport and buildings,” he said.

Global carbon emissions are expected to grow by 2.5% in 2015, a year the UN hopes to finally sign off a global agreement to address climate change.

Oil is still the world’s largest source of energy, but is likely to be surpassed by coal later this decade, says the International Energy Agency (IEA).

(Pic: World Bank)

(Pic: World Bank)

Hefty financial support for fossil fuels is widespread across the world and is blamed for creating inefficient economies where the true costs of energy are not valued.

According to the IEA, fossil fuel subsidies totalled US$544 billion in 2013, more than four times the sum that went to renewables.

In 2014, Iran spent over $70 billion subsidising oil, gas and electricity supplies, closely followed by Saudi Arabia ($60bn), Russia ($45bn) and India ($40bn).

World governments have repeatedly promised to phase out their backing for fossil fuels, most recently at the 2014 G20 summit in Brisbane, but the Overseas Development Institute says the world’s richest countries still spend $90bn a year in the hunt for more oil, gas and coal.

While demand for oil is likely to rise as prices stay low, the World Bank predicts a tougher outlook for unconventional sources of oil that are typically harder and more expensive to extract.

These include shale oil, tar sands, deep sea oil fields in Brazil, Mexico, Canada and the United States, along with oil in the Arctic.

This could lead to a strategic shift in energy capital expenditure flows around the world, away from fossil fuels and into solar, wind and other forms of renewables.

It is a view backed by analysts at HSBC, who believe the long term prospects for curbing emissions could be boosted by the oil slump.

“Lower oil prices should be beneficial for climate because the economics of higher cost projects are less compelling, meaning less production,” they write.

Eamon Ryan, Ireland’s energy minister from 2007 to 2011, said it was unlikely governments would radically switch back to high carbon investments as a result of a short term oil price fall.

“I would hope we learnt our lessons from the 1970s and 1980s. Anyone involved in policy knows – maybe it works for the Saudis for a brief while – but it’s not real,” he said.

“I’d be surprised if it has a fundamental effect on the policy environment.”

Read more on: Energy | |