Falling Oil Prices: An Opportunity for Regulatory Reform?

Martin Wolf in the Financial Times: “Between late June and the beginning of this month, the price of crude oil [world-wide] fell by 38 per cent. This is a big decline … US production of liquids has risen by 4mbd over the past four years. According to HSBC, US output is expected to rise by 1.4mbd this year.”

“At this stage it seems unclear whether we are witnessing a lasting structural downshift in prices. But let us assume they last for quite a while. What would be the consequences?”

“The fall in energy prices will lower already-low headline inflation. This creates two offsetting risks. One is that it might entrench expectations of ultra-low inflation. An opposite risk is that it might encourage central banks to ignore threats of rising underlying inflation. On balance, the former is at present a greater threat than the latter.”

“Falling oil prices threaten to make economies more carbon intensive and less energy efficient. But they also give an opportunity to raise taxes on oil or at least cut wasteful subsidies to consumption permanently. It is an opportunity that any sensible government would seize. Needless to say, the supply of such governments is rather small.”

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