Oil Bust Could Mean Clean-Tech Boom
The current fluctuation in gas and oil prices has caused a flurry of responses in the global economy, ranging from skepticism to fear of another global recession. The most recent oil market plummet has been a missed opportunity to lay the groundwork to move our economy away from fossil fuels.
Over the past two years, the world has seen historic drops in the price of crude oil, going from roughly $105 a barrel in June of 2014 to the current $32 a barrel. On February 23, Saudi Arabia’s oil minister pledged to continue their blistering pace of production. Other OPEC members Venezuela, Algeria and Iran have followed suit. As production continues to increase globally, the recent flooding of the market is seen as an attempt by OPEC members to regain lost market shares from newer sources of oil in Europe, Canada and the U.S. Newer projects like the Canadian Tar Sands and fracking in the United States cannot compete at such low costs.
Low crude oil prices have resulted in decreased costs in complementary markets, such as transportation. And directly tied markets, such as energy production, have all seized the opportunity to lower their own costs. Yet even as companies have started to use cheap oil as an advantage, the global economy has not begun to grow as it has historically done in the past. Growth has been tepid at best.
Instead investors and banks are starting to pull their money from the fossil fuel industry. The result has been thousands of jobs lost in the U.S. alone with a third of our oil producers, 175 companies, becoming more than likely candidates for bankruptcy. G20 countries currently spend $88 billion a year in further fossil fuel exploration. But under current market conditions these projects may be put on hold, or in many cases, become stranded assets if firms go bankrupt.
Questions around future demand also pose a major challenge for the industry. As countries across the globe continue to develop rapidly, they increasingly become more energy intensive. However, energy intensity does not always equate to an increase in fossil fuel demand. Global investment into solar PV, hydro, geothermal and wind capacity continue to grow at an accelerating pace. Growing demand for clean power has sparked innovation and driven down costs. The future of global energy investment points to renewables, not fossil fuel growth.
The two main concerns for the global economy moving forward as we transition away from fossil fuels are protecting once-fossil fuel dependent industries, and building new energy capacity. We need to start with a plan that avoids high levels of unemployment post-transition. Consideration of future power sources must be of major concern. While current technologies are growing, they need to be scaled and deployed at five times the current rate to fuel global demand.
On February 4, the Obama administration proposed a per barrel tax on oil to help pay for federal transportation costs. While this proposal has no chance of being passed into law by the current congress, it opens an interesting doorway to take advantage of current oil market trends to support a transition toward renewable energy. In some sense this is the perfect opportunity to establish a carbon price. Carbon pricing is being attempted in Chinese, European and Canadian markets, among others, expected to cover almost 70 percent of global emissions by mid-century.
Another tactic to support the transition to renewable energy would be to make the carbon price revenue neutral. Such a policy would return all revenue collected back to households and businesses through rebates and tax breaks. This has been successfully implemented in British Columbia where fuel consumption has declined in almost an exact relationship to the increase in costs. As the economy reduces carbon intensity, it becomes less dependent and susceptible to the price fluctuations in the oil market. Similar legislation has been introduced in the U.S. Senate by both Sen. Bernie Sanders and Sen. Sheldon Whitehouse.
As current oil prices continue to drop, banks and investment groups are turning their backs on what once seemed to be a safe bet. This lack of access to capital is sending waves through the oil exploration market, leading to elimination of jobs and abandoned projects. At the same time, oil producers are seeing control slip from their fingers. Demand is shifting to energy sources that do not depend on liquid fuels. As carbon markets are being put in place globally, it is only a matter of time until the United States is forced to follow those who are taking the lead.
Michael Green is the executive director of the Climate Action Business Association, in Boston. For more information, visit cabaus.org.