News - January 30, 2015

Oil prices are dangerously low

Oil prices have gone down dramatically in recent months. Not good news, says LEI economist Arie van Duijn. At present there is a surplus of oil on the market thanks to increasing production of oil from unconventional sources such as tar sands in Canada and shale fields in the US. Meanwhile, demand for oil is going down, not up, because of previously high oil prices and low economic growth. Worldwide it takes more and more effort to maintain the steadily declining oil production from conventional sources such as the oil fields in Saudi Arabia. With oil prices at less than 50 dollars, the oil companies have much less money for investing in oil extraction.’

Is it cheaper then to extract oil from tar sands and shale?

‘With the current oil prices, production of shale oil in the US is running at a loss too. In fact, the producers have run up a debt of 200 billion dollars. At the current low prices it is getting harder and harder for these companies to pay off their debts. That’s the route to a debt crisis, just like in 2008. To secure oil production you need a much higher price.’



 But that high oil price has its disadvantages too, doesn’t it?

‘Exactly. I see a fundamental problem. Governments and the business world want a lot of cheap oil because that is necessary to get economic growth. But in that case, the oil companies cannot keep up the production. So the oil price has to go up, but then our economy cannot cope with such high oil prices and you get mounting debts that get harder and harder to pay off. That oil economy is going to go wrong one way or another.’

 

What can we do?

‘Wageningen UR should carry on investing in knowledge aiming at reducing our dependence on fossil fuels. Besides the biobased economy, what we need is alternatives to oil-dependent food production. Concretely, you could consider high value food systems and regional production, so you require less transport.’