Since the first half of 2014 energy prices have been suffering one of the greatest falls of the last decades, impacting severely most world economies.

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Overview of price movements

From 2010 until mid-2014, world oil prices had been fairly stable, at around $100 a barrel. However, since June 2014 prices have decreased consistently. Oil prices have partially recovered in February and started to increasing a little bit from the end of March, but not sharply, by the end of June WTI and BRENT Crude Oil are approximately $60, rather far from their original levels, moreover the price outlook remains negative. Even though there is a consistent price gap between gas and oil price, natural gas price decreased sharply from mid-2014 with relative increases from March of this year, but still far from the levels before June 2014. Most one-year forecasts (mid 2016) indicate a price of $70 per barrel as an optimistic (and doubtful) forecast. Further fall in crude oil market prices will certainly have an impact on oil and gas suppliers and consumers. On the one hand, lower price should benefit consumers and net energy importing countries, such as most European countries, while, on the other hand, impacting negatively net energy exporting countries.

From the US…

There are various factors underlying the decline in global energy prices. The relevant and continuing rise of US crude output plays a significant role, making the United States the world’s largest oil producer, approaching full energy independence: about 90% of total US energy consumption is met by domestic energy production, as a result, fewer energy imports are necessary. This obviously made an impact as the US used to be the world’s largest oil importer. Meanwhile, US shale gas continues to grow steadily and consistently, accounting for about 80% of natural gas global increase in the year 2014.  Most recent data confirm that the US is today the world’s largest producer of oil and gas, surpassing Saudi Arabia and Russia. The rise of US gas and  oil production in North Dakota, Texas, Louisiana and Alaska was consistently boosted by hydraulic fracturing (the so-called “fracking”), a technique designed to release gas and oil from shale rock, using high pressure water mixtures to create new paths in difficult to reach sites or extending the existing channels. Fracking demands a certain rock conformation and huge amount of water, which explains why it cannot be easily used in any site, such as in Saudi Arabia. The main factor that greatly accelerated the decline in oil prices was the decision by OPEC not to react to this price trend by decreasing production. This decision was quite unusual as it was the first time OPEC, decided not to react to such a relevant price change.

…to China

The decline in China’s energy intensity is another relevant factor, given that China is one the key economic player in the global energy demand. The Chinese economy slowdown and a relevant shift from heavy industry, e.g. steel, iron or cement, affected growth of energy consumption. In 2014, it grew only by 2.6%, whereas average growth in the years prior to 2014 has been more than 6%.

The rise of renewable energies

Another factor, whose importance could greatly grow in the future, is the expansion of renewable energy, particularly solar and wind. For example, installations of solar panels have been growing consistently in China and the US in the last five years. Moreover, the EU has implemented tougher environmental policies towards fossil fuels, as well as economic incentives favorable to renewable energies.

Benefits and Threats/ Who wins and who loses?

Weak prices have not the same consequences for everybody. If prices remain low, as many forecasts suggest, many countries, i.e. energy suppliers with high net exports, will suffer and their macroeconomic policies will be heavily affected.  On the other hand large net importers of oil and countries with higher inflation rates, such as Turkey and India may take an advantage from a fall in energy prices. In India, for instance, commodities, including energy, account for 52% of imports but only 9% of exports.

Belgium is one of the “winners”, not surprisingly considering that oil imports account for approximately 38% of primary energy. The impact of the energy price decrease on national GDP is expected to be positive (+0.5%) and these low levels of prices could lead Belgium to save up to $6 billion in a year. Low prices are likely to have a similar effect on French GDP, as well as other European countries. However, this favorable effect would be tempered by the weight of taxes on fuel prices for consumers. It is indeed not uncommon that taxes account for over 70% of gasoline price.  Furthermore, the depreciation of the euro with regard to the dollar will also reduce the favorable effect of low oil prices, as transactions and negotiations are carried out in dollars.

One may wonder what may be the fiscal impact of this low level of energy prices on government revenue. Even in the “winning” countries, the answer to that question is that it basically depends on the tax structure.  Basically, excises and taxes that do not depend on retail fuel price will not be directly affected by low price level. On the contrary, low prices could even lead to higher consumption, which means higher income from excises. By contrast, low prices would affect negatively incomes from taxes on added value (VAT) which are directly linked to general price level (such as consumer price index). This being said, in many European countries such as Belgium, excises and fiscal components that are not linked to general price level usually constitute the main part of fiscal income from taxation on fuels.

Nevertheless, there are also many losers. In addition to OPEC countries, the current energy prices trend is bad news for countries such as Sweden and Norway. Russia is also a potential loser. The country’s budget relies heavily on gas and oil. As a consequence, prices fluctuations in the latter usually influence a lot the general conditions and stability of the Russian economy. For example, it is usually believed that the fall in energy prices certainly played a role in the crisis of the Russian rouble.

What to expect from the future

The energy picture is changing at a fast pace as confirmed by Fu Chengyu, the Charmain of Sinopec, China’s biggest oil refiner in a conference call: “In the future, fuels will become a non-core business of Sinopec, petroleum or oil and gas will continue to be a major energy source in the future, but they won’t be the only source, more emphasis will be put on our new energy and alternative energies”.

The OPEC itself can be at risk because of further declining prices. If Saudi Arabia continues to maintain its market share by further decreasing export oil prices, this could cause economies of other members of the cartel to suffer. Ultimately, the OPEC Cartel could even break up.

Besides, if prices remain too low, this could also hurt the US. The fracking technique is indeed still more expensive than conventional extracting from non-shale formations. So, fracking is economical only if crude oil price remains above a certain breakeven value (estimated at $60-70 per barrel). The OPEC strategy not to cut production could cause market prices to fall below that breakeven value for a consistent period of time (i.e. 12+ months) and thus make US oil production uneconomical. However, possible innovations and improvements of US fracking techniques could come into play and make fracking more cost-efficient.

Besides, the future of fracking as such is unclear as well. The technique is highly controversial and many environmental organizations have been claiming that fracking has serious consequences for a variety of reasons such as huge amount of water consumption causing water depletion; fugitive emissions of unburned methane (leading to global warming and climate change), local water and air pollution and contribution to seismicity. Environmental and renewable energy policies are also at risk as non-fossil energy sources become less economically attractive when oil and gas prices decrease. In addition, government incentives could not be sufficient nor economically sustainable to bolster the use of renewable energies.

In conclusion, there are opposing forces in the picture and it is difficult to forecast which will be the prevailing one: different drivers could lead to highly different scenarios in the energy market. The US will have to decide how to manage its huge amount of resources and how to face possible problems linked to its extraction techniques, the Chinese economic growth will be determinant for the increase of energy demand and renewable energy expansion could decree the end of an era and the raise of a new one. However, many forecasters agree on the fact that, even in the case of a future relevant increase in energy prices, we would need several years to see quotations back at their original levels.

Energy prices refer here to both oil and natural gas prices.It should be noted that oil and natural gas are substitute goods, at least partially, which implies that they follow similar prices trends.

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