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Why oil price crash is good news for climate, and clean energy

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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 encourages 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.

hsbc oil price

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. (See table above). 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.”

hsbc oil emissions

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.

“Also here we have only looked at the carbon intensity of production and tranpsort, but once other factors are taken into account, such as refining, finished fuel transport and fuel combustion, the carbon intensities are obviously much higher. Lower production now prolongues the carbon budget.”

peak-oil-mdAs Mark Lewis, from French firm Kepler Chevreux noted this week, there are broader signals showing that a global energy transition is already underway. He listed 7 such signals.

1. One of the proposals discussed at Lima, and still an option for the Paris climate change talks, is the complete phasing out of fossil fuels by 2050, or allowing such fuels to be used but only if the emissions from burning them could be entirely offset. “Barring an extremely disruptive technological breakthrough neither of these options would appear realistic today,” Lewis writes, “but the fact that they were raised at all is indicative of an emerging mindset, and this should be of huge concern to fossil-fuel companies.”

2.  Saudi Arabia’s chief climate negotiator, Khalid Abuleif, was quoted as saying in Lima that “climate-change policy will affect our future and we are working very hard to raise our resilience”. He went on to say that “inevitably, oil producers are going to face huge liabilities if the implementation of the convention is advocating a move away from fossil fuels”. As Lewis noted: “If even Saudi Arabia – the world’s lowest-cost producer of oil – is concerned about the implications for its future of the ongoing UNFCCC negotiations and a deal in Paris next year, then how much more worried should the publicly quoted oil majors be given that they, by contrast, are increasingly producing the highest-cost barrels of oil at the upper end of the industry cost curve?

3.  Just as the COP in Lima was about to begin, the Governor of the Bank of England announced that his institution would examine the risks to financial stability posed by “unburnable carbon”, the idea first put forward by Carbon Tracker in its 2011 study of the same name. Lewis again: “In our view this constitutes a very significant development, as it shows that the debate over the future of fossil fuels now encompasses not only climate change but also  global financial stability.”

4. At the beginning of the second week of the Lima COP, the Institutional Investors Group on Climate Change published a study entitled Investor Expectations: Oil and Gas Company Strategy. Lewis’ take: “This study is designed to investors engage with fossil-fuel companies on carbon-asset risk, and is another sign of how closely many of the world’s largest institutional investors are now monitoring the strategies and capex plans of fossil-fuel corporations.”

5. Ed Davey, the UK Minister for Energy and Climate Change, said in Lima that there might be a case for requiring all institutional investors, insurers, banks and other financial institutions to disclose their holdings of fossil-fuel investments.

6.  While the Lima COP has been in progress, the oil price has continued its precipitous drop. Lewis again:  “This is putting huge pressure on the industry, not least on the oil majors, and in our view the majors should see this sharp drop as a wake-up call regarding the potential longer-term price consequences of a global climate deal.”

7.  Finally, the decision by E.ON to split itself into two companies from 2016 announced on 30 November, one concentrating on the legacy business of fossil fuels and nuclear, the other on the growth business of renewables and energy services, shows that some companies are not waiting for a global climate deal to be struck before taking action but have decided to start adapting to the new energy reality now.

“In our view, all of these developments are important indications of a major transformational shift in the global energy system, a shift that is being driven by a combination of policy measures on the one hand, and economic and technological forces on the other,” Lewis writes.

Conclusion: Fossil-fuel companies can no longer ignore the signs of change.

“The risk to fossil-fuel companies in future will come not only from ever tighter climate policies, but also from broader financial, economic and technological forces. In our view, these forces will only become more prevalent in coming months and years, and all fossil-fuel companies should therefore be thinking about how they deal with the challenge of the structural shift now underway in the world’s energy system before it is too late.”

Rod Day, writing for Greentech Media, says it could be that some of that capital simply does not get deployed because of the economic uncertainty that a fall in the oil price creates. But not for long. He noted the plunging price of solar, of LED lighting, and now battery storage.

“The point is, while collapsing oil prices will result in many generalist investors remaining on the sidelines, key tipping points are being breached across multiple clean energy technology opportunities,” Day writes.

“Cost declines march forward, new channels and financing platforms are being launched, and market acceptance via peer influence is overcoming reticence around what used to be curiosities. If you’re a fan of investing into high-growth markets, it’s a great time to be jumping in. Because not even today’s oil market turmoil will be able to hold back these market inflection points for long.”  

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  • michael

    “Lower oil prices should be beneficial for climate because the economics of higher cost projects are less compelling, meaning less production,”

    Giles, I thought most analysis of the current drop in oil price was due to increased production? OPEC deciding not to constrain supply with Saudi in particular upping their daily production

    http://www.bloomberg.com/news/2014-10-16/saudi-arabia-oil-stance-seen-targeting-opec-output-discipline.html

    the underlying demand hasn’t changed, just a flood of supply. so the emissions aren’t going down, unless you do a gap analysis against those even dirtier forms such as artic/tar sands.
    What time frame do you think the “less production” is aimed at?

    • Tony Pfitzner

      If the smart money moves to renewables and away from coal and oil, because of both price and perception of risk, it will be far more devastating to these industries than a mere price variation, because it sets up a feedback loop leading to a decline in both their supply and utilization.

      This would likely not be an absolute decline in the short term, rather a reduced rate of increase, and of course different fuels represent different cases, but it may only take a few years before we see an absolute decline in the use of polluting fuels.

      e.g. A lot of companies are pulling out of tar sands production, so production in this sector is probably already dropping.

      • SunGod

        Anything that impacts negatively on demand and lowers the incentive to produce more fossil fuels even in the short term helps, at any rate.

        Hopefully it accelerates the divestment already taking place in the energy sector, movement towards solar and wind power, and adds more impetus to production and demand for electric and hybrid cars.

        The point about the feedback loop is also a good one – and once businesses and energy companies move to renewable energy, they’re not likely to be returning.

        • Bob_Wallace

          Adding wind and solar is basically non-reversible.

          Since there are no fuel costs for either there will be no tendency to replace either due to future changes in fuel costs, even if fuel prices were to plummet.

          When the turbines and solar panels wear out there will be a great tendency to replace them since much of the infrastructure will already be in place.

          Each percent taken from fossil fuels is unlikely to be given back. Take back 3% a year and we would be fossil fuel free before 2050.

  • Chatteris

    Price instability – generally bad for business.

  • I agree, ‘Conclusion: Fossil-fuel companies can no longer ignore the signs of change’.

    But wish I could be a optimistic as you on this one Giles. I reckon this is a temporary situation. Production will be cut, oil prices will go up again and they’ll crank up the frack wells.

    Only answer is for governments to substantially increase fuel taxes, especially in the US where I am staying at the moment and tax is about 10c/L. The number of huge 3 tonne SUV being used as shopping trolleys is obscene and there are reports that now petrol is down to $2.85/ gal (about 85c/ L), there are even more being bought.

    The only suggestion I’ve seen from here is to peg the price at $3.50/ gal (far too low I think) and make up the difference in tax. That’s wet lettuce leaf stuff.

    The fuel tax needs to be permanently increased 10 times (for the US) and doubled for Australia to near $1 per litre. So people pay > $2 per litre or $6 per gallon. That would really make people change their vehicle choices and driver habits, while further reducing demand for fuel and curbing the fracking activities.

    I’m surprised this has not been mooted a Lima or other Climate talks as an international initiative

    • Bob_Wallace

      Ben, it makes sense but it won’t happen in the US. (At least not now Perhaps in a decade or so if people get much more concerned about climate change.)

      Americans have been sold the belief that “taxes are bad”. It’s not even possible to pass a modest fuel tax in order to repair our deteriorating roads and bridges.

      The only hope I see is to get battery prices down quickly and make EVs the cheapest way to drive around. At that point we’ll see a massive decline in oil use and the nastiest oil sites wells will close.

      • Unfortunately you are right Bob and the same applies to Australia.
        Maybe bloggers such as ourselves can initiate a debate/ develop a coherent and palatable argument FOR taxes on the negative behaviour – overuse of large heavy automobiles i.e. fuel guzzling – which is as prevalent as smoking was 40 years ago?
        It’s got to start somewhere; I’ve been doing this for several years now through the organisation I belong to – Sustainable Transport Coalition of WA – http://www.stcwa.org.wa. You can subscribe online to their free monthly e-news.

        First thing is to bust the myths that are perpetrated in the media:
        1/ Fuel is expensive in the US / Aus. (it is not; they have the 3 and 4th cheapest fuel prices of >30 OECD nations).
        2/ Higher fuel taxes hurt the poor – apparently they have to drive old fuel guzzlers (nonsense, my wife and I are ‘poor retirees’ living on <$40,000/ year and we drive an 11 y.o. Daihatsu Charade that gives 5.4L/ 100 km and cost $13,000 new; (worth about $2000 now with 160,000 km).

        I am disappointed to see Labor and even the Greens sticking to the latter myth and opposing fuel tax indexation for cynical political reasons. Apparently they would rather raise income taxes or other regressive taxes.

        I'd rather have higher fuel taxes than GST extended to essential foods, which is currently being enthusiastically espoused by some commentators.

        • Peter Campbell

          I agree about petrol being cheap. The consumption of a charade has always been my bench mark. Our first car was a mid-80s charade and routinely got 5L/100km. Now we have another charade, 1991 model, with 260,000 but since 215,000km it has had an electric motor in it. We also have a current model VW Golf (bottom of the line petrol manual version, first time we ever bought a car new) and am pleased to find this bigger, heavier, generally very nice car meets the charade bench mark but imagine what it would do if the same technology were in a light car like our 80s charade was (600kg). With three drivers in the house we also have a Mitsubishi iMiEV (get one for $17K-search on carsales.com.au). Electricity is even cheaper to run cars, even paying the small premium for GreenPower.

      • Harry Verberne

        What the US and other countries such as Oz need is a Pigouvian tax on consumption of fossil fuels offset by lower income taxes.

        That would send a “price signal” so beloved of the neo-cons that consumption of ff is discouraged.

  • Mark Melocco

    I think the Saudis are waking up to the potential of unburnable reserves, so rather than lower production levels to keep prices high they are starving the high cost producers and making sure that they deliver all of their reserves. Hopefully they are doing enough to prepare themselves for the period “after oil”. In the meantime this is bad news for Russia, the frackers and Tar Sands producers, also low oil prices will most likely kill projects like the Keystone XL pipeline in the USA for now, and add to potential risk factors for any decision to restart it in the future.

    • Miles Harding

      I wouldn’t count on that!
      There doesn’t appear to be any viable exit plan for the Saudis. The time will come, and likely soon**, that they will become a net oil importer and be unable to pacify their burgeoning population, triggering a revolution like occurred in Egypt.

      ** The current Saudi domestic oil consumption trend will intersect total oil production by 2030, according to bloombergs in 2012:
      http://www.bloomberg.com/news/2012-09-04/saudi-arabia-may-become-oil-importer-by-2030-citigroup-says-1-.html

      I suspect that the reserve situation is worse and it will be well before 2030, possibly before 2020 when this occurs.

      On the plus, the Saudis will generate more renewable energy, but on the minus, the giant Ghawar field appears to have peaked in 2009 (vast in-fill drilling about that time and now CO2 injection) and is in serious decline, along with most other fields in the area. It is only a matter of time before that titanic sinks.

      • Dragon

        I would assume they’ve worked out an internal timeline where they figure they can sell as much of their reserves as possible to finance the transition to renewables before their supply runs out. Renewables can happen very quickly when there is a strong will to do it, and they don’t have to deal with price-raising BS like import tariffs on solar panels from China.

  • Steve Gill

    hsnc or hsbc – accuracy=credibility

  • ejhr

    I’m a bit late here,only just found the blog.
    Renewables are just fossil fuels under another guise. They will only ever be an answer at the local level, which is good, but useless at national/international levels.
    The price we are paying is just as much a sign of Peak Oil as if it were expensive. What peak oil means is volatility, not decline and greater expense. The glut is demand driven as we are already used to more expensive oil and the lower price is not fooling many. Lets see if SUV’s sell in greater numbers. I believe we, everywhere, are in a deflationary economy and we will never get back to the cheap oil fuelled days now gone. The overhang will last a little while and we may think it’s OK, but it’s final.

    • Bob_Wallace

      “Renewables are just fossil fuels under another guise”

      A year or so back we passed the point at which there was enough solar installed that we generate more electricity in a year than we use to manufacture solar panels in that year. We passed that point years earlier with wind.

      We used fossil fuel to bootstrap wind and solar. Now we’re net positive and in the process of leaving fossil fuels behind.

      • ejhr

        That’s not even slightly true. It’s just wish fulfilling fantasy. For starters renewables are based around alternative electricity supplies, but very little substitutes for oil. We use nearly a cubic mile of oil every year. All current renewable technologies feed on the oil teat.
        It would take hundreds of millions of solar panels to match such requirements. Renewable technology is quite high tech. That means it is BRITTLE. That means breakdowns and repairs are not trivial. That means we need constant new parts and means of access. Wind towers use helicopters. They are big machines with a limited life span.
        The only solution renewables offer, apart from to feel good and attract subsidies [without which they are unviable] is at a local level.
        So when we return to village life over the next few decades we may be able to find a place for them

        • Bob_Wallace

          It will take millions (actually billions) of solar panels and millions of wind turbines to power our future grids.

          Solar panels high tech? They’re basically a thin sheet of rock between a couple pieces of glass.

          Wind turbines high tech? Electric generators with blades to catch the wind.

          These are old tech. Stuff we’ve been using for decades. We’ve tweaked them as we’ve gone along, but the basic stuff inside is the same.

          Brittle? Just the opposite. We’ve got 40 year old solar panels still going strong and our first generation turbines at Altamont Pass lasted 30 years before they started requiring too much attention.

          And when a solar panel or wind turbine does go off line it’s a tiny, tiny bit of the total. Very unlike when a large thermal plant goes down and sends grid operation scrambling for replacement.

          “Return to village life”. Doomer porn.

          • ejhr

            Don’t be so quick to show ignorance. Hi tech is not just the latest device. Hi enough tech requires frequent maintenance and spare parts impossible to manufacture if our fossil fuels get too expensive to afford and we lose the ability to extract them, even at any cost.
            Brittle refers to the grid and other hi tech systems. But you knew that so you obfuscate. It doesn’t cut the mustard.
            You are like the emperor with no clothes, here at least.
            If you speak sense somewhere else then stay there.

          • Bob_Wallace

            Oh, please. Don’t compound your ignorant claims with more ignorant claims.

            We can do fine without fossil fuels. Our electricity and personal transportation will be cheaper. Plus we’ll spend less on medical care thanks to cleaning up our air.

            As well we are making our grids smarter and more resilient.

            Now you seem to have some fantasy that we’re going to crash our civilization and return to caves or some sort of whacko idea along those lines. I’m sure there are sites where you can find like-minded people. This is a site about energy solutions.

          • ejhr

            The ignorance of reality is entirely yours, 100%.
            We mathematically have to end this civilization. There are no exceptions in a finite world.
            Look at this youtube by Tom Murphy
            {I can only post a snapshot]

          • Bob_Wallace

            What a joke.

          • ejhr

            The joke is on you. You are an ostrich with head in the sand.