WUEG March 2015 Newsletter

this mechanism, the EU would remove free
allowances from the market (lowering supply)
when there are too many in the market and put
them in a ‘reserve,’ or bank. When there are
too few and the credits are trading at too high
a price, the EU will take carbon credits from the
reserve and inject them in the market
(increasing supply), thus lowering the price.
Through regulatory control of supply, the
market should more accurately reflect the true
cost of carbon emissions. This program plans
to roll out in 2018, and with luck, a worldwide
cap-and-trade system will follow in the years to
come.
Sources:
The European Parliament
Interfax Global Energy
Oil Prices Will Rise by Year’s End
Max Isenberg – senior member, Academic Committee
The extended fall in oil prices has many
clambering that this rop represents a paradigm
shift in commodity pricing and that prices will
remain low if not fall further through the end of
the year. However, despite the lack of a
rebound so far in 2015, by the year’s end, oil
could make up much of its loss since
November, returning more than halfway to
$100 oil from the WTI bottom around $40.
The price of oil will be ultimately driven by
changes in supply and demand, and the low
prices will necessarily force an equilibration.
Recent reports from American shale
production sources have shown large declines
in rig count (6% of total capacity coming off
line in the span of a single week). While it’s true
that the wells that are being shut off first are
the most marginal and least profitable ones,
the quick drop off in production from wells
means that in the medium term, rig count
drops will start squeezing supply as the
remaining wells start to decline. Additionally,
continued unrest in Iraq and the Middle East
has left some supply unreliable and thus a drag
on production.
On the other side of the equilibrium equation
is demand. With prices lower, one would
expect consumption to increase, even of
staples which have relatively inelastic demand.
Indeed, a spike in demand did occur, as
consumption increased by over 1 million
barrels in February, reducing the size of the
monthly surplus in production by two-thirds.
While there is still an oversupply of oil, the rate
by which this oversupply is growing is slowing
and, by year’s end, can be expected to reverse,
allowing prices to once again rise.
Additionally, the US Federal Highway
Administration released driving data for the
month of December, the first full month after
the price collapse, with a new record number
of vehicle miles traveled. Finally on the
demand side, sales of SUVs increased by 5% in
February over the previous year. Though not
the gas guzzlers of the past, light trucks still
consume much more fuel than sedans and are
becoming increasingly popular with the recent