By Sue Landau
With the ink barely dry on a global accord to rein in greenhouse gas emissions, the price of oil has resumed its staggering slump. What does this mean for efforts to wean our civilization off fossil fuels and move to renewable, sustainable energy sources?
Is the recent global climate change agreement doomed?
Oil has always been a boom-and-bust commodity, but the glut and price crash since mid-2014 has come as a surprise. Crude oil had seemed to be becoming more and more expensive, rising to above $100 a barrel in 2011 and staying near that mark for more than three years.
Those high oil prices encouraged investment in solar and wind power, which began to compete with fossil fuels.
In the United States, the world’s second biggest polluter, expensive oil led to greater fuel efficiency for cars and tipped the balance for producing shale oil, which emits less carbon. U.S. carbon emissions fell over this period.
Now the benchmark oil price has fallen to around $30 a barrel. That could mean the world will burn more and more oil, feeding carbon dioxide emissions just as they should be starting a long-term, permanent decline.
But this does not have to be the case.
A golden opportunity to cut subsidies to fossil fuels
“Lower prices alone would not have a large impact on the deployment of renewables, but only if policymakers remain steadfast in providing the necessary market rules, policies and subsidies,” the International Energy Agency (IEA) said in its 2015 World Energy Outlook.
There are certainly some serious negative environmental impacts. Cheap gasoline has already hit electric car sales in the United States and favored sales of diesel cars. The IEA estimates that $800 billion of energy efficiency investments could be set aside up to 2040 if oil remains cheap for long.
But there are also positive effects. The low oil price has already kiboshed plans for investment in fossil fuels to the tune of billions of dollars.
By late 2014, several studies were predicting sharp cutbacks in oil and gas exploration as well as project finance for fossil fuels, and the price of oil has halved since then. Investments abandoned in such circumstances are the most expensive, like oil exploration in the Arctic, or the dirtiest, like Canada’s tar sands.
Cheap oil also provides a golden opportunity to reduce or eliminate subsidies to fossil fuels and put a price on carbon. These moves can have harsh economic effects at first, which would be mitigated by a low oil price.
In China, the biggest polluter, the state-controlled refining industry has been ordered to price as if oil were still $40 a barrel, and the difference will be paid into a fund for controlling emissions. India, Indonesia and Angola have cut subsidies on fuel consumption. In the United States, car makers still have to abide by a target to double fuel efficiency by 2025.
A persistent glut of crude oil would be a danger.
Paradoxically, oil-producing countries squeezed by low prices are now moving to cut subsidies, encourage energy efficiency and install renewable capacity, according to The Guardian newspaper.
Despite all this, the prospect of a low- or no-carbon economy — the ambition of the Paris climate talks — could be jeopardized if the oil glut persists.
Extraction costs for U.S. shale oil have been driven down, the oil producers’ cartel OPEC has not moved to cut production as in previous price slumps, and Iranian oil is coming back to world markets now that sanctions have ended.
At the same time, China’s economy is slowing and with it, the country’s voracious energy demand, which was a big factor in pushing oil prices sky high.
However, there is another difference with previous oil cycles that gives impetus to the energy transition: the economics of renewables.
“The best oil price for energy transition is a heavily fluctuating one.”
Renewables are technology driven, so their costs come down over time. Fossil fuels, by contrast, require heavy investment for extraction and transport, and the cost of the raw material is subject to unpredictable economic and geopolitical factors.
Rick Bosman and Derk Loorbach, experts in sustainability and energy transition at Erasmus University in Rotterdam, say that gives renewables an edge.
“Renewable energies, although often still more costly than its fossil counterparts, have one characteristic that makes them very attractive in a world of highly volatile fuel prices: their costs are known,” they wrote in an article in Energy Post in January.
“The more oil prices will fluctuate, the more this benefit of renewables will get the attention of consumers and investors. Therefore, the best oil price for the energy transition is a heavily fluctuating one.”
Sue Landau is a freelance writer and translator based in Paris. She worked in financial and business journalism for 25 years at the International Herald Tribune, Reuters and the Investor’s Chronicle, chiefly in London and Paris. She reported on energy, new technologies, media and advertising, corporate and industry issues, wealth management and investment, and regional development.