Cheap Oil, Costly Power
Oil trading at less than $50 a barrel should nudge consumer spending higher, provided the savings on fuel and other energy costs are passed along. So politicians have an economic imperative to hound suppliers to share the windfall with customers. And enlightened self-interest should prompt energy companies to share the windfall voluntarily, before governments stick their noses in.
Oil's fall has been precipitous, with Brent crude down more than 50 percent in the past four months. Oil took another tumble today after Goldman Sachs cut its forecast for where the bottom might be. The investment bank is predicting $42 a barrel for Brent in the coming quarter, compared with its current value of about $48. (Imagine how an independent Scotland's budget planning would look in the current scenario.)
The energy issue is more acute in Europe than in the U.S. The U.S.'s growing energy independence helps keep domestic prices in check, and Europe's post-Fukushima aversion to nuclear energy, notably in France and Germany, makes the EU's energy-producing future less certain. Average residential electricity prices for the European Union are double those of the U.S., and have climbed faster than for Americans in recent years, according to the U.S. Energy Information Administration:
And because this is an election year in the U.K., energy prices are a hot topic in Westminster. The U.K. Treasury said last week that it's scrutinizing the pricing behavior of utilities while Chancellor of the Exchequer George Osborne decides "if any action needs to be taken." Opposition leader Ed Miliband said today that he wants to introduce laws tying domestic bills to wholesale energy prices.
U.K. consumers have seen their domestic energy costs march relentlessly higher, as the following chart shows:
Moreover, those increases have defied a corresponding decline in wholesale energy costs. Natural gas, for example, contributes a bit more than a quarter of the U.K.'s energy needs, less than coal (at 33 percent in the past five days), though more than either nuclear (17 percent) or wind (11 percent). In the years 2010-2014, households saw their electricity bills increase by 25 percent, while wholesale gas prices declined by 18 percent (they've since fallen even lower):
With wage increases still anemic almost everywhere, the drop in oil prices needs to be passed on to consumers everywhere in the form of cheaper heating and lower transportation costs. "We're from the government and we're here to help" are words no company ever wants to hear. The message from falling oil prices for energy producers is clear: Do it to yourselves before the government does it to you.
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