In 2014, when the price of oil last crashed, the world’s governments had no agreement in place to fight climate change. The following year, leaders signed the Paris Agreement.
Green investments have soared since then. About US$1.2 trillion has been poured into renewable energy, and global electric vehicle sales reached 2 million last year. Bloomberg NEF expects as much as US$10 trillion to be poured into clean energy by 2050.
The agreement also marked a cultural watershed, with emissions targets now policed by a growing environmental movement that is shaping politics from Germany to India. In a sign of the times, activist Greta Thunberg and Tesla Inc founder Elon Musk are now two of the most famous people in the world.
Illustration: June Hsu
So when this week Saudi Arabia and Russia joined in a price dispute that wreaked havoc on global markets already rattled by the COVID-19 pandemic, it looked like the major oil-producing nations reasserting their supremacy in the short term. Instead, it might prove to be another step in a longer-term trend toward ending oil’s power to hold the world to ransom.
The price of a barrel of oil remains an important economic indicator. However, the relentless push to move away from fossil fuels suggests that its geopolitical effects are likely to be softer than in the past, with the imperative to combat global warming assuming its place.
“The impact of the oil price on broader economic growth has been decoupling ever since the 1980s,” said Shane Tomlinson, deputy chief executive officer at environmental thinktank E3G. “We could see exceptional movements in the oil price in the next few months, but I don’t think that changes the fundamental need to address climate change.”
Oil’s fall to about US$35 a barrel from US$55 just last week has major implications for addressing climate change. Low prices incentivize more use of oil; it squeezes the budgets of oil companies, putting clean-energy projects in doubt; and some governments feel pressured to prop up struggling oil companies. All that drives up emissions, which is bad news for global warming.
However, if low prices are sustained this time, there might be big positives for fighting climate change.
Renewable energy is a more mature industry than five years ago. As it becomes a less risky investment, it has attracted big investors who are showering a lot of cash and building some projects that rival the capacity of conventional power plants.
At the same time, oil exploration is becoming less viable economically, with an increased risk that even those projects that go ahead no longer yield good returns and with worries about stranded assets growing.
“Now it doesn’t make sense to reduce your investment in renewables if the oil price crashes,” BNP Paribas Asset Management sustainability head Mark Lewis said. “It’s more logical to reduce your investment in oil.”
That reality points to a broader change in investor sentiment since Paris that affects companies and governments alike.
A number of large investors have come together under groups such as Climate Action 100+ to demand companies put sustainability at the heart of their business models, and that is not likely to change.
Tesla has effectively become a proxy for how the green economy is viewed by investors. Musk has demonstrated that a mass-market electric vehicle is viable, prompting all the major automakers to follow his lead. He is building his latest plant outside Berlin, in a show of his intention to take the fight to the heart of Europe’s leading luxury vehicle producer.
Tesla is after all the world’s second-most valuable automaker by market value after Toyota Motor Corp.
For governments worldwide, pressure for policy measures has mounted as the issue increasingly resonates, in part due to the kind of direct action and media campaigning espoused by Thunberg.
Low oil prices offer one reason to heed that voter call, since it is a good time to end fossil-fuel subsidies or raise taxes on fossil-fuel consumption. Such a move could also help avoid the sorts of destabilizing anti-government protests seen in France, Iran and Ecuador when energy price increases were proposed.
It could even be done in a way that “protects or even benefits poorer households and communities,” World Resources Institute climate and economics vice president Helen Mountford said.
The goal of reaching out to “left-behind” communities is a dynamic driving policy from the post-Brexit UK to South Africa and swaths of Latin America that suffered waves of unrest late last year.
During the last down cycle, between 2014 and 2016, when oil briefly dipped below US$30 per barrel, India cut annual fossil-fuel subsidies from US$29 billion to US$8 billion and even raised taxes on consumption.
Some of the money raised was diverted to renewable-energy subsidies, after setting an ambitious goal to deploy as much as 175 gigawatts of mainly solar and wind power by 2022 — about twice the power generation capacity of the UK.
“Many countries are pursuing electrification and decarbonization to make them less dependent on the volatility of oil markets,” said Adnan Amin, former director general of the International Renewable Energy Agency. “This kind of event will only reinforce that momentum.”
Also since 2014, the power of OPEC’s 14 nations to shape the market has been weakened by US shale production. (OPEC’s Vienna base is home to an Austrian government that now includes the Greens as a junior coalition partner.)
The US — which is not a member of the cartel — became an oil exporter again on the back of its shale revolution, surpassing Russia and Saudi Arabia in 2018 to regain its status as the world’s biggest producer. US President Donald Trump has cheered the US energy resurgence as an example of taking back control.
However, the collapse in oil prices weakens the shale industry’s ability to pump at a profit and even pushes some of the producers toward bankruptcies, adding to economic uncertainty surrounding the virus that may hurt Trump’s re-election bid, Amin said.
Since Trump unilaterally pulled the US out of the Paris Agreement, it could yet tilt the presidential race toward a candidate more in favor of climate action.
Meanwhile, in Brussels, European Commission President Ursula von der Leyen doubled down on EU plans to achieve climate neutrality by 2050, despite the emergence of what she called “unforeseen challenges.”
“Today it’s no longer the question if there will be a European Green Deal or whether the EU will become climate-neutral, but the question is how we’re proceeding and how far-reaching will the transition be,” Von der Leyen said on Monday.
That stance is understandable given that EU citizens say they want the bloc to focus on tackling climate change and preserving the environment as its No. 1 priority, a Eurobarometer survey for the European Parliament showed.
“Clearly we cannot ignore what’s going on globally,” EU Environment Commissioner Virginijus Sinkevicius said on Bloomberg TV, adding that the global “climate emergency didn’t go anywhere.”
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