Oil price crash is good news for climate and clean energy
Director at Independent Litigation Funders
The collapse in global oil prices to 5 year lows is causing a lot of speculation about what this means for climate change, and clean energy. High fuel costs, it is said, encourages the use of alternative fuels. Low fuel costs, on the other hand, simply encourage more consumption of conventional fuels.
True, but only up to a point. The price of the fuel as a commodity will also influence how much money is invested in oil projects – needed to maintain supply – and where the trillions of dollars in global capital will flow. In the case of oil, extraction is getting more and more expensive and the oil majors have struggled to find new oil reserves that make economic sense.
The fall in the oil price makes that even more difficult. So, from the point of view of the climate, that is a good thing, because that capital will likely flow to alternatives such as solar and wind and other renewables and technologies – the inevitable result, Alliance Bernstein warned early this year – of energy price deflation.
A report from HSBC highlights the dilemma for the oil industry. Many of the new reserves, such as tar sands in Canada and proposed fields in the Arctic, don’t make economic sense – and that is before the cost of refining and delivery.
“Lower oil prices should be beneficial for climate because the economics of higher cost projects are less compelling, meaning less production,” the HSBC economists write in the analysis. And to prove its theory, oil giant Chevron overnight put its proposed drilling program in the Arctic Sea on hold “indefinitely.”
At these prices, drilling in the Arctic simply makes no sense. Doug Matthews, an analyst and former oil and gas director with the Northwest Territories government, said: “With the price of oil down by 40 per cent since June companies all over the world are starting to pull in their horns.”
And high cost oil fields usually – but not always – equate to high carbon emitting fields. This next graph shows that oil sands is amazingly polluting, and the Arctic reserves would be twice as polluting as the main fields currently in production.
But that still doesn’t tell the whole story. The energy analysts at HSNC also looked at the national accounts of Middle East oil producers. They calculated that the break-even oil prices in the context of what oil price is necessary to fund public spending and leave the government with a zero budget balance is significantly higher than the production cost of oil.
In Saudi Arabia for instance (a country using 1.5m barrels oil a day for desalination to satisfy water needs in 2012), an oil price of $US20/barrel would have balanced the budget in 2003, but in 2015 an oil price of $US90/b is required to cover increased levels of spending.
That explains why Saudi Arabia is so keen to invest in renewables, particularly solar, to satisfy its domestic energy needs. And has earmarked more than $40 billion to do so.
“On balance from a climate perspective, we think that lower oil prices are beneficial because the deteriorating economics for higher cost of extraction projects push back production volumes, thus lowering CO2 which is needed to extend the carbon budget,” the HSBC economists write.
Why oil price crash is good news for climate, and clean energy reneweconomy.com.au
The collapse in global oil prices is good for the climate, and clean energy. Big Oil has put Arctic drilling on hold because it no longer makes economic sense. That will allow extend the world’s ca…