Gas station pump Wang Xiao/ZumaPress

The Oil Price Opportunity

Though lower oil prices may boost overall global growth, with the oil-importing advanced economies gaining the most, the impact on efforts to combat climate change could be devastating. But this decline in oil prices could also provide a rare political opportunity to introduce an explicit carbon price.

WASHINGTON, DC – The sharp drop in the price of crude oil since late June has been grabbing headlines worldwide – and producing a lot of contradictory explanations. Some attribute the fall largely to declining global growth expectations. Others focus on the expansion of America’s oil and gas production. Still others suspect a tacit agreement between Saudi Arabia and the United States aimed at, among other things, weakening political rivals like Russia and Iran.

Regardless of the reason for the price drop – probably to be found in some combination of these factors – the consequences are the same. Though, as International Monetary Fund Managing Director Christine Lagarde has noted, lower oil prices may boost overall global growth, with the oil-importing advanced economies gaining the most, the impact on efforts to combat climate change could be devastating.

Indeed, a sustained decline in oil prices would not only make renewable energy sources less competitive now; it would impede their future competitiveness by discouraging research and investment. More generally, it would reduce the incentive for consumers, companies, and governments to pursue more energy-efficient practices.

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