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Why did oil prices fall? Is it a temporary phenomenon, or does it reflect structural changes in the global oil market? If it is a structural change, it will have a major impact on the world economy, geopolitics, and mankind’s ability to cope with climate change. Using the US consumer price index as a deflator, the actual oil price fell by more than half between June 2014 and October 2015. The actual oil price in October 2015 was 17% lower than the average price since 1970, although it was much higher than the price level in the early 1970s and from 1986 to the first few years of the 21st century.

    Spencer Dale, former chief economist of the Bank of England and current chief economist of BP, explained the factors affecting oil price trends in a speech. He said that people generally think that oil is a depleted resource, and its price is likely to rise over time; the demand and supply curves of oil are both ups and downs (technically called "inelastic"); oil mainly flows to the West Country; Opec is willing to stabilize the market. He said that most of these traditional views about oil are wrong.

    One factor that is subverting these assumptions is the shale revolution in the United States. Starting from almost zero in 2010, U.S. shale oil production has risen to about 4.5 million barrels per day. Dell believes that as long as the price is between $50 and $60, most shale oil can be profitable. In addition, between 2007 and 2014, shale oil productivity (measured by the initial production capacity of each set of drilling equipment) increased at an annual rate of more than 30%. Most importantly, the rapid growth in shale oil production was the decisive factor in the sharp drop in crude oil prices in 2014: US oil production grew almost twice as fast as demand. The key is supply, fool.

    What impact will this have?

    One of the effects is that the short-term supply elasticity of oil is higher than in the past. In shale oil production, variable costs account for a relatively high proportion, because the investment is fast, and the income is also fast. Therefore, shale oil supply responds more sensitively to prices than traditional oil, which has high fixed costs and relatively low variable costs. This relatively high elasticity of supply means that the market should be able to stabilize prices more effectively than in the past. But shale oil production is also more dependent on the availability of credit than traditional oil. This adds a direct financial channel to the supply of oil.

    The second impact is that the direction of trade may change dramatically. In particular, China and India are likely to become extremely important net importers of oil, while the United States' net imports will decrease. In the next 20 years, 60% of new global oil demand may come from these two major Asian countries.

    By 2035, three-quarters of China's oil consumption may be imported, while nearly 90% of India's oil will be imported. Of course, this is based on the assumption that the transportation system will continue to rely on oil during this period. If this is the case, we can easily infer that the benefits that the United States gains from maintaining stability in the Middle East will shrink, while the benefits of China and India in this regard will rise. This may have a profound impact on geopolitics.

    The further impact is related to the challenge of OPEC to stabilize oil prices. In the "World Energy Outlook 2015" (World Energy Outlook 2015), the International Energy Agency (International Energy Agency) predicts that the oil price in 2020 will be US$80 per barrel because the increasing demand will absorb its projected temporary oversupply. . The report also put forward a lower oil price forecast, believing that oil prices will remain at around US$50 per barrel within this decade. The latter forecast is supported by two assumptions: the elasticity of US oil supply and the decision by OPEC oil-producing countries (especially Saudi Arabia) to maintain production share (and the oil market itself). However, as public spending exceeds oil revenues for a long time, the low-price strategy will bring pain to oil-producing countries. How long can this deadlock last?

    The final impact is on climate policy. The emergence of shale oil highlights a fact that has long been quite clear, that is, the global oil supply capacity is not only huge, but also expanding. Forget about peak oil production. As Dell pointed out: "According to very rough calculations, the world has consumed about 1 trillion barrels of oil in the past 35 years. In the same period, the proven oil reserves have increased by more than 1 trillion barrels."

    The problem is not that the world is running out of oil. The problem is that oil reserves far exceed consumption, and the world still holds a glimmer of hope, hoping to limit the increase in global average temperature to no higher than the pre-industrial level of 2°C. Burning existing oil and natural gas reserves will exceed the global carbon budget by three times. Therefore, the economics of fossil fuels are diametrically opposed to the economics of responding to climate change. The two must abandon one. Profound technological changes may weaken the economics of fossil fuels. If not, politicians will have to do it.

    This highlights the huge challenges faced by leaders of various countries at the Paris Climate Change Conference. But from their response to the drop in oil prices, we can see how bad policy makers have done. According to data from the International Energy Agency, in 2014, subsidies for the supply and use of fossil fuels still reached 493 billion US dollars. Yes, if there were no reforms since 2009, they would reach $610 billion. Therefore, we have made progress. But today's low oil prices justify the removal of subsidies.

    In developed countries, the opportunity of low oil prices could and should be used to offset the consumption tax, so as to maintain the incentives for the economical use of fossil fuels, increase fiscal revenue and reduce other taxes, especially employment. But this important opportunity has been almost completely missed. People cannot help asking whether the Paris climate change conference has the slightest chance to promote effective action, rather than "decorating the facade."