Financial Crisis Could Cause Delayed Oil Price Spike

Includes: OIL, USO
by: Research Recap

Falling energy investment will have far-reaching and, depending on how governments respond, potentially grave effects on energy security, climate change and energy poverty, the International Energy Agency says. “Cutbacks in investment in energy infrastructure will only affect capacity with a lag, often amounting to several years. So, in the near term at least, weaker demand is likely to result in an increase in spare or reserve production capacity,” the IEA says in a report prepared for the G8 Energy Ministerial in Rome on 24-25.

But there is a real danger that sustained lower investment in supply in the coming months and years, could lead to a shortage of capacity and another spike in energy prices in several years time, when the economy is on the road to recovery. The faster the recovery, the more likely that such a scenario will happen.

Other conclusions:

  • In the short term, slower economic growth will curb growth in emissions. But, in the medium and longer-term, the crisis may lead to higher emissions, as weak fossil-energy prices and financing difficulties curb investment in clean energy technologies, increasing reliance on fossil-fuelled capacity.
  • At the same time, investors will remain risk averse, so that funding for clean energy projects will be available primarily for proven technologies in attractive markets. Once the recession is over, the likely burst of economic growth or “catch-up effect” may also cancel out any short-term emissions benefit.
  • There is also a very real risk that the world’s preoccupation with dealing with the crisis will lessen the chance of reaching a comprehensive climate-change agreement in Copenhagen.
  • Cutbacks in energy investment will impede access by poor households to electricity and other forms of modern energy – a vital factor in pulling people out of poverty.