Understanding why is critical to the future of the planet. One possibility is that we have a temporary dip in the price of a commodity that notoriously overshoots price expectations on the high side and also on the low. It takes a long time to bring an oil field into production and the rate of growth of the world economy varies much more rapidly. It is entirely possible that all that is happening is that the world economy has been growing slower than expected and that has driven the price below trend. The long term trajectory could be upwards and we could be in a temporary exaggerated low. Demand for oil could soon return to its old levels and the old order of things might reassert itself. We might simply be dealing with a temporary blip in demand.
However, it is also possible that the price change has been driven by fundamental changes in supply and if that is true then the future could look very different to the past. If you listen to the fracking lobby then they will tell you that the key supply change is that the US has gone for fracking in a big way and this has increased supply and driven down price. It has to be admitted that this is part of the picture. But that impact has been achieved at the huge danger of opening up an entirely new source of carbon dioxide emissions that the planet simply could not safely absorb. If that is the price of cheap oil then it is a hell of a price.
The other possible cause has received relatively little publicity. It is green energy. We are often told that green energy costs more and pushes up our energy bills. What we are rarely told is that when you add green energy to the supply mix in the kinds of quantities that are beginning to be achieved then you inevitably drive down the price. An extra supplier equals a lower price.
The technology of solar panels has been advancing particularly rapidly and that of storage looks highly likely to follow suit. Advances in insulation techniques and in the efficiency of homes and machines are also making significant strides. This must have an impact on the overall balance of supply and demand and that impact must be to reduce the price.
When the price of oil is high there begins to be a huge incentives to drill for it in some of the most inaccessible and environmentally risky places. The north sea, Alaska, the Arctic, shale rocks etc. If it can be driven lower then those investments no longer make sense.
It is therefore entirely possible that what we are witnessing is not a temporary shift in the price of oil but a shift from one era of technology to another. We could be seeing the first serious steps away from an economy based on heavy use of fossil fuels and onto one using much more renewable energy and products that require much less energy.
It is of course obvious that lower prices for energy don't just put investors off from creating new oil wells. It also puts them off from investing in marginal projects in the green energy supply sector. But here the trend is in the opposite direction to that of the oil industry. As the easy to extract oil runs out costs must rise. Politically and socially as well as economically. With every passing year the technology of renewable energy improves and costs fall. As more people switch over the larger production runs cut costs even faster and they also drive even further advances in technology. This could easily mean that we are reaching the point where the economics are starting to change permanently. It is entirely possible that green energy could finally be reaching the point where it can not just compete but can often win the competition.
There also some signs that the political will is changing. When it was first growing China didn't appear to bother too much about whether its factories were filthy gas guzzlers so long as they kept on getting bigger and the country got richer. Now its leaders are genuinely worried about the pollution levels in its cities and rivers and the cost of all that imported oil. They are investing in huge solar panel complexes along huge swathes of the long railway line from Beijing to Urumchi. Instead of shrugging off environmental issues they have placed them at the heart of their next five year plan and they have agreed with the US to put serious proposals to the Paris climate change conference. The measures aren't enough but the shift in attitude could be a game changer.
We could be on the verge of moving over to technologies that rely much more heavily on renewable energy and where the energy that we generate is often produced close to where it is used often as an integral part of the building itself. Such a change would make much of the infrastructure of oil companies irrelevant and expensive. Carrying high costs for infrastructure capacity that is much larger than future needs is not a recipe for profitable oil companies. Their product could become as much as part of the past as steam engines and canal boats.
In such circumstances an intelligent government would be investing rapidly in developing and implementing the science and technology of the new era. Since the 2015 general election the UK government has scrapped subsidies on solar, provided local objectors with an almost total planning veto on new wind turbines, provided fracking developers with new rights to over-ride the objections of local people, and decided that it is safe to guarantee for 30 years to pay a price double that of the current market rate for a clumsy large scale nuclear reactor.
Economic signs are never easy to read and it is easy to be mistaken. The UK government is betting the house and the planet on everything going back to normal and oil continuing to be the driving force for technology into the future. This of course raises huge environmental concerns. But consider the strategy for a moment just in terms of narrow economic self interest. At the very least it doesn't look like a very safe one way bet. At worst they are making a huge miscalculation about the future course of modern technology. If they are even slightly wrong then their course of action is likely to be devastating for the future economic welfare of everyone living in Britain. We look highly likely to miss out on the next phase of technology and that is never a great way to ensure that your economy and people prosper. Our government seems determined to prepare furiously for the past. It doesn't inspire confidence.