Date: 2024-10-19 Page is: DBtxt003.php txt00018436
Media / News ... Fossil Fuel Economics
Bloomberg Green
Bloomberg Green ... What cheap oil means for the climate
Peter Burgess
Bloomberg Green
7:21 AM (1 hour ago) to me
Bloomberg
In climate news today...
- L.A. plans to be the first U.S. city to burn hydrogen for power.
- Oil price swings could serve as a wake-up call for ESG investors.
- Foresight Energy, another U.S. coal miner, files for bankruptcy.
- Post-virus stimulus packages could undermine climate goals.
- Akshat Rathi's Net Zero
A low oil price may no longer spell doom for climate action.
A series of surprises has caused the oil price to plummet and wreak havoc in global markets. The big driver is politicking between key producers Russia and Saudi Arabia, both of which are digging in for a bitter price war. If oil remains so cheap for months or even years, it could have major implications for addressing climate change.
Typically, cheap oil makes it easier to use more. It also causes oil companies to cut spending, including those on clean-energy projects. And it forces governments to provide subsidies to prop up some of its struggling oil companies. All of which helps increase emissions, and is bad news for the warming atmosphere.
However, if low oil prices are sustained this time, the picture is likely to be a lot more complicated. There could even be some positives for the climate in the long term. Here are a few reasons why.
First, the risk profile of energy investments has changed.
Drilling for oil remains a high-risk play. In the past, however, there was a very good chance that hitting an oil field would yield good returns. That’s not always the case now, as worries grow about so-called stranded assets.
In addition, renewable energy is a more mature industry than five years ago, when oil plummeted. As a less risky prospect it has attracted big investors, who are showering a lot of cash and building some projects that rival the capacity of conventional power plants.
“Now it doesn't make sense to reduce your investment in renewables if the oil price crashes,” said Mark Lewis, head of sustainability at BNP Paribas Asset Mangement. “It's more logical to reduce your investment in oil.”
Second, wider investor sentiment has changed.
Following the 2015 Paris climate agreement, 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.
“That is why there is unlikely to be the same automatic responses from companies as in the past,” said Tom Burke, chairman of environmental thinktank E3G.
Third, government commitments have strengthened.
Governments now realize that a time of low fuel prices is a good moment to turn off fossil-fuel subsidies or increase fossil-fuel consumption taxes. These moves can help avoid the sorts of protests that France, Iran and Ecuador saw when energy price increases were proposed. They could even be implemented in a way that “protects or even benefits poorer households and communities,” said Helen Mountford, vice president of climate and economics at the World Resources Institute.
Consider India’s example. During the last low-price cycle, between 2014 and 2016, when oil briefly dipped below $30 per barrel, the country cut annual fossil-fuel subsidies from $29 billion to $8 billion. It even raised taxes on consumption. Some of the money India raised was diverted to renewable-energy subsidies, after it set an ambitious goal to deploy as much as 175 GW of mainly solar and wind power by 2022—about twice the power generation capacity of the U.K.
Fourth, the OPEC cartel has lost some of its powers to shape the market.
“The sustained impact of U.S. shale has significantly reduced the ability of OPEC to control prices,” said Shane Tomlinson, deputy chief executive of E3G. “That trend will continue.” Even if shale takes a hit in the current price war, Tomlinson thinks it is relatively cheap and quick for investors to “get back in the shale game.”
Such a world, if it exists, creates an interesting scenario. “The idea that is beginning to come into the consciousness of some players is the desire to be the last one standing,” said Burke. Because producers like Saudi Arabia can turn a profit on low oil prices, they can “drive small producers out of the market now, so there’s a longer life for low-cost producers,” he added.
Finally, though oil price remains an important economic indicator, it becomes less important as the world looks to move away from fossil fuels. “The impact of the oil price on broader economic growth has been decoupling ever since the 1980s,” said Tomlinson.
That’s no small change for a world where oil has commanded the economy and oil-rich countries have dominated geopolitics. If oil indeed loses its influence, it could be a big positive for climate action.
Akshat Rathi writes the Net Zero newsletter on the intersection of climate science and emission-free tech. You can email him with feedback.