Energy Efficiency

COVID19: Green stimulus should step in to counter oil price crash

There is no inevitable link between oil prices and carbon emissions, a lot depends on responsible policy  

By Tarun Gopalakrishnan
Published: Wednesday 22 April 2020
Crude oil tanker. Source: Flickr

What do sub-zero crude oil prices mean for the climate? At first glance, cheap oil could make fossil fuel substitutes such as electric vehicles or wind powered electricity look expensive enough to hurt decarbonisation. It is a cold comfort that these shocking price drops are a result of poor demand, which is a problem for all energy suppliers, including renewable power and technology producers.

But poor demand is not enough to cause a crash similar to the 2008 crisis which led to demand and price slumps, but nowhere near this magnitude. The difference is that the supply side of crude oil equation has seen significant turbulence since then.

Foremost among these is the massive expansion in the United States shale oil and gas production, which made it a significant exporter for the first time in decades. The expansion was countered in 2013-14 by Saudi Arabia with a familiar tactic — hiking oil production to drive down prices, ensuring that only producers with deep cash reserves such as a petro-state budget could survive. 

The Saudi price war was only partially successful — the US shale industry shrank somewhat, but never disappeared. As of 2019, the US was among the top five exporters in the world and projected to surpass Russia by 2024.

That and the general threat of low oil prices may have convinced the Organization of the Petroleum Exporting Countries (OPEC) and Russia to ink a pact in 2016 regarding cooperation on crude oil production. Between 2016 and 2019, the market, it seemed, had found a new normal.

The 2016 pact has been sorely tested by tepid global economic performance of the last two years, exacerbated by the current pandemic. Consultations between the OPEC and Russia in March failed to find a consensus on who would sacrifice how much production in the post-COVID world.

So Saudi Arabia aggressively pursued market share again, offering steep price discounts to its buyers, coupled with its old standby of production increases. Russia responded in kind; the supply glut combined with depressed global demand has resulted in unheard-of prices.

What does this mean for the climate?

Price wars are designed to put some producers permanently out of business. In this case, the most vulnerable are US shale producers, who need prices of $50-60 to survive. As corporate entities, they are unlikely to survive, potentially eliminating a significant source of world supply.

This is precisely why the US last week brought Russia and OPEC to the table to agree on production cuts, which will only take full effect beyond June. This will likely allow US shale oil to survive in a diminished form, again. Worse, while some of the corporate entities may perish, the oil reserves remain.

In the past, when prices have revived somewhat, the American shale reserves have attracted huge amounts of capital. This, despite their inherently precarious economic prospects and with the industry has destroying 80 percent of the capital it has attracted until now, according to one former shale company CEO.

Besides, the Trump administration is busy with an environmental deregulation agenda that it claims is part of its pandemic response, but which is simply a giant freebie to disproportionately benefit the oil industry.

This is the great danger of these prices —at a time when the global economy is hurting, government effort will be expended on helping certain industries stay afloat, and letting others go bust.

One direct solution to this is a strong campaign against environmental deregulation of highly unsustainable shale oil wells. Cheap oil is not cheap when the impacts on communities and the climate are considered.

The second solution needs to come from importers. India has already hiked its tax on fuel to offset the sharp drop in prices. However, most of this enhanced collection is being used to cover for anaemic direct tax collection.

A significant part needs to be earmarked for green stimulus spending, such as assisting renewable power producers, and enhancing domestic manufacturing of renewable technology (especially solar panels and electric batteries).

Finally, a longer-term solution would re-direct world capital toward diversifying the economies of oil exporters. This is not a solution focused on Saudi Arabia or Russia, whose massive reserves necessitate an almost ideological commitment to oil.

Countries like Mexico, Angola, Algeria and Gabon, however, are smaller, but significant exporters who also have strong potential to become global hubs of renewables manufacturing and electricity.

Investing in green manufacturing in these countries would, in theory, have two benefits.

It would make them more resilient to price wars initiated by larger producers and reduce the incentive for any one producer to make oil drastically cheaper.

Secondly, it would make climate concerns an agenda item even in OPEC (or OPEC+) negotiations, which could prompt discussions of a managed decline in oil production.

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