Spend energy gauging impact of renewables

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Can anyone read the oil price accurately? We can immediately work out the price of Brent Crude and West Texas Intermediate, and the small but not insignificant differences between the two.

But do we know the difference between prices that are low due to a difficult-to-read economic cycle, and those that are low because of a paradigm shift?

The green lobby, for one, believes oil prices are now being affected by renewable energy and similar technologies that have become more economical in recent years.

For them, this provides some comfort with regard to climate change, though most also believe we will have to develop technology that removes carbon dioxide from the atmosphere in order to be successful on this front. It will be interesting to see what comes out of the Paris conference this week.

But what if oil’s slump is really about China’s inability to maintain high levels of GDP growth, particularly as it shifts an economy reliant on government investment to one that is more consumer-led?

The difficulty must be in finding reliable information, and I think this applies wherever you stand on the debate.

The difficulty must be in finding reliable information, and I think this applies wherever you stand on the debate. John Lappin

In terms of energy markets, information may well tell you whether to buy, sell or hold an asset or commodity for some months hence, but it is surely much more difficult when the time horizon is in years.

Try to discover an accurate price for energy once government subsidies have been removed, for example.

That is almost impossible when you take into account the push behind nuclear power, a dash for gas that surely won’t happen without some sort of state intervention, and the likes of solar feed-in tariffs – despite recent cuts here. Meanwhile, fracking is certainly an interesting proposition for policymakers to pursue in the UK.

We can look at wholesale markets to aid price discovery, but it doesn’t take a nefarious player such as Enron messing about with prices to underline just how difficult this is. To do so in a global context must be next to impossible.

What new regulations will come out of the Paris climate talks? What will Opec, with many of its members engaged in proxy wars or facing extraordinary instability, do in the next six months?

As the Financial Times reports, hedge funds’ oil shorts are at record highs, which tells you all you need to know about the short-term consensus. But what does a price of below $50 a barrel mean in the long term for investment advisers and their clients?

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