A dangerous deal
The Trump administration brokered a deal with 23 oil producing nations to cut international oil production by almost 10 percent. Benjamin Zycher argues that this deal will not support higher oil prices because:
- A substantial part of the recent collapse in global oil prices has been caused by a sharp decline in demand conditions due to the COVID-19 pandemic;
- The larger the number of participating nations, the greater the incentives for any given one to produce more than its quota;
But there will be a long term harm as the U.S. industries harmed by the artificial increase in crude-oil prices will demand that government find a way to shield them from harm either through a tariff or an import quota. This is reminiscent of the 1959-1973 U.S. quotas on oil imports.
A misguided oil market cartelization deal that will go unrewarded
By: Benjamin Zycher – American Economic Institute
For EU governments the oil price decrease could be a windfall
The global price benchmark fell by two-thirds from $60 per barrel in mid-February to $20 per barrel currently. Prices are expected to remain low for a long time. Jacob Funk Kirkegaard suggests that EU governments should raise total taxation by the decline in the total price, on average about 18 cents per liter, to a total of about €1 per liter, a 22 percent increase in fuel taxes. Why?
- EU governments are incurring ever bigger deficits to fund emergency measures to combat the COVID-19 virus. The figure below illustrates the value of keeping fuel prices at the early 2020 level.
- New public and private investments in the EU Green Deal will be essential to any recovery strategy. In order to ensure that private investors remain sufficiently incentivized to make such investments in the future, EU governments must maintain high fuel prices, preventing them from declining from their pre-pandemic level.
Europe should seize oil price windfall to fund its pandemic response
By: Jacob Funk Kirkegaard – Peterson Institute
In the era of COVID low oil prices present a trade-off: Reduce retail prices or reduce budget subsidies?
In countries providing substantial energy subsidies, policymakers face a choice between passing, fully or partially, the fall in international oil prices to consumers or keeping retail prices unchanged and reducing subsidies. Considerations influencing this choice include:
- The prioritization of fiscal needs—reducing subsidies will free up resources for other purposes;
- The need for a fiscal stimulus vs. measures supporting the most affected sectors – cutting retail prices would amount to a general stimulus, which may or may not be helpful in a lockdown;
- The expected persistence of the low oil price period—the shorter and more uncertain the duration, the less justified the cut in prices;
the country’s policy objectives to reduce emissions in the fight against climate change;
Fiscal Policy Responses to the Sharp Decline in Oil Prices
By: IMF
