Like many, I’ve been completely gobsmacked by the plummeting oil price – down from over $100 a barrel at the start of the year to $64 a barrel this month. Trying to unpick what has happened has led me to the following line of thinking:

• The growth in demand is slowing dramatically, worrying all producers (IEA);
• Production is actually falling (IEA);
• Shale oil production in the US is threatening OPEC’s stranglehold on oil markets (BusinessWeek);
• OPEC are trying to drive out shale oil and other competitors by keeping quotas high (BusinessWeek) – presumably draining their stocks.

Given this political/economic wrestling match, it is very hard to say where oil prices will be in 2-3 years time. Given the relative flexibility of shale oil extraction compared to lumbering OPEC conventional extraction, I can’t help but think, like BusinessWeek, that OPEC are going to emerge a much weaker force as a result of their tactics. It may be they are up against the wall and lashing out in desperation. So the answer to my question above is: both – resurgence for shale, long term decline for OPEC.

This uncertainty is a massive problem for investors in alternative energy – who need to know what the market will be like to invest. I can’t help but think that the solution is still a carbon tax to reflect the damage done by carbon based fuels – along with the removal of fossil fuel subsidies. This would stabilise the market and give renewables a level playing field.