Does $30 a Barrel Oil Threaten EU Energy & Carbon Targets?
Unfortunately, the Simple Answer is YES.
Oil prices have now reached historic lows of less than $30 a barrel. This translates into a price per kWh of less than 2 cents before refining, transport etc costs are included. Even accounting for taxes and other costs this translates into a price per kWh of less than 4.5 cents in Ireland or 2.9 pence in the UK.
This will have profound effects on Europe's ambitions of increasing energy independence, security, efficiency and decarbonising the economy. Paybacks for even simple projects which would have easily passed the payback periods required, may now (if energy prices remain low) not provide the returns investors demand.
In Ireland & the UK this the reduction in the price of petrol and diesel (even if short term in duration) will inevitably mean consumption increases and less investments will go into efficiency gains. Think about it. If it cost €200 a month to fuel your car last year and you were thinking of upgrading to a more efficient model, this saving might now be only half what you were expecting. This may also perversely increase the size of the vehicle people purchase as they will not feel the impact of higher fuel costs when they make these purchasing decisions.
So what is the answer? Well one simple one would be to increase carbon taxes, even slightly to take out some of the slack. This would also cover some of the lost revenues Governments would have been expecting from taxes on fuels such as VAT. There is also an opportunity to reinvest the savings on fuel costs made today to hedge against the almost inevitable future increases in costs.
Energy prices dropping to similar levels has occurred before and then it slowed the investment into the renewables and energy efficiency sectors. Now, in the face of ever increased targets for efficiency, renewables and reduced CO2, it will be interesting to see how governments, businesses and most importantly people, react to the crash in the energy world.