Despite the aid for the purchase of fuel of 15 centimes per liter, the price of SP95 petrol at the pump has increased by 25 centimes in six months, and by 60 centimes in one year. This price shock is extremely violent, in particular for the most modest households poorly served by public transport. If it were to be maintained over the long term, this should have an equally strong impact on fuel consumption. Businesses and households will react to this oil shock as during the last quarter of the last century, by going on a “waste hunt”: buying a more energy efficient car, lowering the thermostat, electrifying heating or heat pumps. Economists estimate that over the long term, a 10% increase in energy prices reduces energy consumption by 8%. The price signal works!
Fossil energy producing countries, and in particular Russia for natural gas, have only partially responded to the increase in Western demand following the end of the pandemic, causing this price increase. The attempt by most consuming countries to cushion the impact of this rise on households by lowering taxes has only exacerbated it by blocking market adjustment, pushing prices even higher.
By supporting demand, this policy has only led to an even more massive transfer of wealth from Europe to oil-producing countries, especially Russia. The European embargo on Russian oil will only have the effect of changing transport flows, with China and India sourcing from Russia rather than the Middle East, with the Europeans recovering production from the latter. History will harshly judge our refusal to make some sacrifices in the form of energy sobriety so that we do not find ourselves in the situation of financing the Russian army attacking Ukraine.
Leave reserves underground
Are we therefore doomed to the high cost of fossil fuels in the decades to come? The answer to this question depends on our ability to credibly trigger the energy transition at the global level. The latest IPCC report tells us that to meet the 2°C commitment, we cannot emit more than a thousand gigatonnes of CO2 in the 21st century. You should know that if we decided to consume all the proven reserves of fossil fuels on Earth, we would emit more than twenty times this “carbon budget”. If we were credible about our collective climate ambition, we would therefore only need to consume one twentieth of these reserves, reserves which make up the bulk of the wealth of many oil-producing countries.
However, the value of a resource depends on its rarity. This scarcity of oil made a strong impression after the report of the Club of Rome fifty years ago. It supported market prices. But the fight against climate change is forcing us into a rapid energy transition, which should in theory wipe out this scarcity effect, forcing producers to leave oil underground. In theory again, the oil-producing countries should then all try to sell their reserves before it is too late, flooding the market with oil and causing prices to fall drastically.
The reality, however, is quite different, and this calls for two conclusions. The first is that the markets do not believe in this rapid transition. The second is that we cannot bet on this transition without having a credible carbon pricing policy. However, the European Parliament has just refused the Commission’s proposal for a carbon price mechanism for consumers at the same time that it will ban new thermal cars in 2035. We could then find ourselves in 2034 with a very low price of gasoline at the pump thanks to the explosion of OPEC that this transition would generate, while forcing consumers to buy electric vehicles.
It will be a political nightmare, where the yellow vests of 2018 will appear to us as peaceful Saturday picnickers. Climate policies based on prohibitions or standards in fact pose far more economic, social and political difficulties than those based on a single carbon price with redistribution of tax revenue to the poorest households. Especially since this carbon tax will force the oil-producing countries to lower their prices in order to be able to compete with Western renewable energies. Our European climate policy deserves better than dilettantism, demagoguery or naivety.