As crude oil is used less and less for energy production in the future, because renewables will be favoured, its effect on the price of energy will decrease. On average, energy may be cheap today because of the oil component, but that will not necessarily be true in the long-term since energy from renewables is not cheaper than that from oil at the current prices. And the world will need more renewables to meet the targets of the Paris climate agreement. And scientists warn that gas and particularly shale gas is not necessarily more environmentally friendly than oil or coal over a certain period of time. In conclusion, it is clean renewables that we should go for to produce energy, and biomass only if needed.
On the economic front, important oil-producing countries such as Saudi Arabia have understood that their economy has to further diversify away from oil production. The Saudis are said to have put aside close to an extra two trillion dollars in their Sovereign Investment Fund to do so. That amounts to about two-thirds of the annual GDP of the UK. Other oil-producing countries should and will follow suit, or face macro-economic hardship.
As low energy prices are an important part of consumer prices, directly and indirectly, we may see an end to the current very low inflation period in the coming years. And that would not be a bad thing. However, more than just increasing energy prices will be needed for that to happen. The bulk of the economic disintermediation due to the digital revolution should be behind us, and the wages of the middle class, including the number of people in that class, should stop decreasing in the developed world.
Will cheap energy stay around and if so for how long?
The reliance of the west and developing countries on oil, coal and gas will not change dramatically overnight. It will be a gradual process. Few people predicted that renewables would advance as rapidly as they did, and even fewer people saw the shale oil and gas revolution kick in so quickly and so importantly. Who knows what new discovery on the technology side, or on the energy source side, is waiting to see the light? What if energy transportation became 10 times more efficient? What if solar panels or windmills substantially improve their energy conversion rate?
Similar to most raw materials, energy prices seem to be moving in waves over longer periods of time. The only thing that can possibly be said today is that the upward pressure on energy prices is gaining momentum. When that will happen fully, and for how long, is a matter for a crystal ball.
