The collapse in global oil prices might end up being bad news in the short term for the transition to green energy, as cheaper crude could see more use of road vehicles and aircraft. However, on the flip side, it could see companies move away from exploiting expensive fossil fuel deposits.
The plunging price of crude could prompt more people to use personal vehicles and airplanes rather than public transportation, and encourage the purchase of bigger, fuel-hungry models such as sport utility vehicles.
For individuals as well as businesses, a cheap barrel of crude also means cheaper heating oil, a slowdown in energy savings and could delay schemes to convert to “greener” electricity.
Photo: AP / General Motors
However, by reducing the profits of oil majors, cheap oil could see some potentially less profitable exploration projects put on hold, which would help cut future carbon emissions.
For example, that is particularly the case with shale oil in North America, which is costly to extract and is seen as not profitable at less than US$50 per barrel.
However, Greenpeace UK oil finance adviser Charlie Kronick said that it could also delay companies in their move toward becoming more environmentally friendly.
“In purely financial terms, cheap oil will make it easier for fossil fuels to compete with the increasingly affordable renewables, making the economic case for companies like BP [PLC] that are trying to reinvent themselves as greener energy producers more challenging, and potentially slowing the transition,” Kronick said.
“Expensive oil makes the alternatives, like electric vehicles, more attractive. Cheaper oil creates a headwind for that change,” he told reporters.
City, University of London’s Bobby Banerjee said that given the climate crisis and promises from a number of countries to achieve net-zero carbon emissions by 2050, investments in the sector were long-term.
“Oil prices always fluctuate, no government makes decisions on oil prices,” Banerjee said, adding that investment had already begun, helped by state subsidies that guarantee oil majors’ income.
Countries such as Britain are gradually closing all their coal-fired power stations.
The combined result has been that carbon dioxide emissions in the energy sector dropped 2 percent worldwide last year, data from independent energy think tank Ember showed.
Many businesses, notably investment funds, are also taking into account a high “carbon risk,” which has led the world’s biggest asset manager, Blackrock Inc, to pull its investments in coal.
All of these factors risk being supplanted in the short term by the COVID-19 pandemic, which has paralyzed the economies of several countries, grounded air traffic and, in the case of Italy, put the entire country into lockdown.
The demand for oil, especially from the world’s second-biggest consumer China, is in free fall. This should lower carbon dioxide emissions temporarily and even on a more sustainable basis if the effects of the coronavirus are as severe as the 2008 global financial crisis.
The situation is “a perfect opportunity to remove the subsidies to oil companies, because oil prices are low,” Banerjee said.
“It’s a good time to put the carbon tax very high to accelerate the energy transition,” he said.
However, given the likelihood of a looming economic slump, that could be politically problematic.
The transition to low-carbon energy is not dependent on the price or availability of fossil fuels, Kronick said.
“The shift is ultimately driven by the need to avoid catastrophic climate change and the inevitable economic disruption that comes with the climate emergency,” Kronick said.
“The shocks that we’re currently experiencing show that rapid changes are possible, though not always welcome. The economic conditions that we face now will pass, but the need to leave oil and gas in the ground won’t,” he said.
“The additional challenge is to make sure that the corresponding crisis in the oil markets doesn’t delay the low carbon transformation that we must begin now,” he added.
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