The climate agreement reached in Paris today could herald a permanent collapse in oil prices as countries compete to sell glutted production in the face of diminishing demand. Swing producers, like Saudi Arabia, stand to lose big if the movement to leave oil in the ground makes progress, and may try to forestall losses by flooding the market while demand is still relatively high. Such countries already continue at high production levels despite the oversupply of oil in world markets.
Government measures to reduce fossil fuel use will exacerbate heavy losses already suffered by producers that have come on line in recent years. Even those that have successfully started new production will have no choice but to continue to maximize production to in order to repay loans.
Falling oil prices will reduce the incentive to switch from oil to renewables. This creates an enhanced environment for instituting a revenue neutral carbon tax, which could follow a Democratic Party victory in the 2016 USA presidential election. That, plus anticipated increased incentives to develop renewables and focus on this sector by a wide range of financial institutions may truly bring about a new energy paradigm. If only we’re not too late.