Oil prices have been falling so far that they have gone below zero, and dragging the stock market down with them. In other words, your retirement savings are being devalued by the drop in oil prices, and jobs in oil production or the supply chain of oil are at risk. Investors are acting as if high oil prices are good for the economy.
This argument makes no sense, but it has been driving market behavior since at least early 2016. Why does it not make sense? Because low oil prices mean that consumers have more money left, after paying for gasoline, to buy other things, things that we really want, like food, education, clothing, that generate more jobs and more local economic growth than oil. This is good for the economy—good both for workers and for investors.
Nevertheless, lower oil prices—a result of reduced demand for flying and driving as a result of the response to COVID-19—still spark selloffs of stocks. This is a problem because a declining stock market exacerbates the economic challenge the whole world faces due to the virus.
The out-of-control pandemic is not the only health and economic challenge the world faces. We also are looking at immense economic and environmental risks of out-of-control climate change.
This blog discusses a new idea for limiting climate change that can work in tandem with some well-established ideas. The new idea is to set global limits on oil production: a system similar to cap-and-trade for oil that establishes production quotas for each year, quotas that decline quickly enough to comply with the goals of the Paris Agreement. This new idea is synergetic with well-established ideas for massive investments in clean energy and its infrastructure, driven by climate-protective energy policy.
These well-established ideas are also topical when we consider how to promote economic recovery from the virus and its control methods.
Here is how the two ideas interact. If we invest in clean energy at the level I have proposed, oil demand will decline rapidly. Since the clean energy investment strategy allows the world to meet the Paris Agreement goal, the rationing scheme would not constrain energy services to consumers and businesses but rather would backstop and encourage the political decisions needed for clean energy.
This is the same dynamic that has led to low emissions permit prices in California and in the Regional Greenhouse Gas Initiative states of the U.S .Northeast.
But markets are likely to be slow to recognize the reduced role of oil, just as they have been slow to plan for the rapid decline in coal consumption ,which is largely the result of clean energy (although low prices of natural gas have also helped). The result: lots of soon-to-be-stranded investment in fossil fuels, and the unplanned loss of jobs in the oil industry and its supply chain. Also the loss of existing stock market value in oil and gas businesses. Not something that we want.
But what happens if we anticipate that decline and ration the ability to sell oil? We don’t have to speculate about what could happen, because we have 50 years of history. This is more or less what OPEC did. And it is what the current proposed agreement between Russia and OPEC, which the stock market seems to like, would do: limit production to increase oil price and profit to producers. We minimize job loss, provide a planning context to allow divestment of dirty energy investments and their replacement by clean energy.
Raising oil prices has adverse equity consequences, and these will need to be dealt with as part of the plan. There is a clear path to do so. The reason is that while most analysts think that higher oil prices will reduce consumption significantly, the evidence says otherwise. See also here. Raising oil prices through quotas on production would allow oil companies to make unreasonably high levels of profit by selling the allowed amount at a much higher price. This means that we need to develop a revenue-sharing proposal to fund a just transition to clean energy.
This funding would assure that the combination of clean energy investment and dirty energy phaseout would save consumers money, especially low income consumers-- in developing countries as well as domestically--and create new employment opportunities.
Since the clean energy economy is a net winner economically, the math works: the money we save from cheaper energy efficiency and renewables and public transportation and smart neighborhoods exceeds the losses from the dirty fuel industries, and the health savings from lower air pollution and avoiding climate-change-generated floods and fires and future pandemics, come along for free.
The opportunity here is that the biggest barrier to bold political choices on limiting climate change has been the resistance of the oil industry, which would be one of the few losers under a climate-protective plan. A production quota with windfall profits taxed and diverted to social equity and a just transition to clean energy could turn this change into a broad win-win.
This blog discusses a new idea that may or may not have merit. Clearly, if it does, there would be a lot of important implementation issues to address, without knowing whether the world is capable of making the idea work. But we need something to change in the American and world political dynamic to address the climate problem before things get too much worse.
This blog proposes to explore one idea for such a change.