Do Cheap Oil Prices Really Damage the Environment?
It’s no surprise that oil is a hot topic right now. The price of the sticky stuff has plummeted by half in the past two years. If you drive a car, that might be good news for your wallet — but terrible news for the environment, which keeps on warming due to greenhouse gases being pumped into the atmosphere. Many arguments out there state that low oil prices, by spurring the burning of fossil fuels, accelerate environmental destruction.
However, that argument ignores many aspects of the renewables industry, which isn’t quite as fragile as you might think. Global warming is a reality caused largely by burning fossil fuels like gas or oil. But due to technological advances and a host of legislative initiatives, there’s still time to stop its effects — even if oil prices are low.
To get into the real meat of this issue, though, it’s necessary to start off by exploring the reasons behind the latest crash in the price of oil. These reasons will show that oil prices are not inherently based on the productivity of certain fossil fuel practices — rather, oil prices are just as heavily impacted by politics and geopolitical power plays, which is yet another edge that renewable energies have over oil.
The Oil Crash Was Caused By Economic Manipulation
There’s nothing like an oil shock to wreak havoc on the global economy. The first oil shock occurred in 1973 when the Organization of Arab Petroleum Exporting Countries (OPEC), a cartel comprised of several major oil producing countries, decided to place an embargo on oil in the wake of the latest Arab-Israeli War. The chaos that ensued included rising costs to consumers, diminished U.S. leverage internationally and the destabilization of entire economies.
Conversely, decreases in the price of oil are supposed to provide a macroeconomic boom. According to the World Bank, “A 10 percent decrease in oil prices would raise growth in oil-importing economies by some 0.1 — 0.5 percentage points.” The prices of the world’s oil benchmarks, Brent and West Texas Intermediate (WTI), plummeted from over $110 per barrel to as low as $27 per barrel at the beginning of the year. What caused the price of oil to change so drastically so fast?
The most obvious cause is price manipulation from OPEC. Countries like Saudi Arabia have access to the cheapest oil supplies and use this to their advantage. Borrowing the same tactic used by John Rockefeller — what he called giving competition “a good sweating” — OPEC drastically lowered the price of oil in order to bankrupt competitors. In November 2014, Saudi Arabia forced other OPEC members to continue producing oil despite a fall in global prices. They decided to produce more than 30 million barrels per day, exceeding OPEC’s projected demand by one million barrels.
Their target were U.S. shale producers, who were experiencing a boom. However, shale-oil production utilizes technology that is much more time- and cost-effective than are traditional rigs. The U.S. drilled about 20,000 new shale oil rigs between 2010 and 2015, which allowed America to maintain a steady supply without feeling the effects of OPEC’s price manipulations. For the first time, the U.S. oil industry was actually producing enough for a ban on crude oil exports from the U.S. to be lifted.
Another unforeseen obstacle to OPEC’s aims was the Iran nuclear deal. Early this year, both the U.S. and E.U. lifted about $100 billion in financial sanctions on Iran because nuclear inspectors found that they stopped parts of their nuclear program. Now, just over a dozen miles off of Iran’s coast, 50 million barrels of Iranian crude oil sit, just waiting to be sold. It is no exaggeration to say that Saudi Arabia and Iran hate each other (politically, at least). Iran is not an OPEC member and has no compunction to aid their adversary’s oil cartel activities — Iran is itself adding some much needed competition to the Middle Eastern Oil Market. This will also keep oil prices down.
On top of that, the Chinese economy has seen a massive slowdown. Starting in 2015, China’s economy, the world’s second largest, began to grow at much slower speeds than before due to massive debts, industrial overcapacity and a shift from a highly export-dependent economy to a more inward-looking consumer marketplace.
China’s whirlwind industrialization had depended on raw materials like oil and commodities like iron. In the wake of China’s economic slowdown, prices for these commodities, along with oil, began to slump simply because China’s huge economy wasn’t demanding quite as much as it used to. China’s suddenly lackluster demand for oil and other commodities led to massive price slumps in both sectors. (Just ask anyone who has invested in mining or oil stocks over the past two years.)
To make matters worse for oil producers — who reap vast profits when prices are high — basic economics are keeping rigs pumping, even as prices plunge. According to energy research firm Wood Mackenzie, even at a price of $25 per barrel, less than 10 percent of the world’s oil suppliers would lose money. In contrast, the costs of drilling new rigs are steep. Shutting down some rigs actually costs producers more than continuing to produce even at current prices.
Companies have reduced investment, including cuts to the workforce to lower costs, in order to decrease the costs of operation. Pumping oil is still more profitable than shutting down.
If Oil Prices Are Low, Why Aren’t We Polluting More?
A big question remains, however: If oil prices are so low, shouldn’t the global economy be doing exceedingly well, and by extension polluting a whole lot more? After all, low oil prices encourage manufacturing, driving and all other sorts of energy-intensive activities. Some have drawn the conclusion that if crude oil were to stay at its current price of around $45 to $55 a barrel until 2050, energy efficiency would likely be curbed substantially. However, that doesn’t tell the whole story.
For one thing, predicting oil prices that far into the future is something of a fool’s errand, as any stock analyst would likely tell you in an instant, and companies will continue to invest in the industry as a result of these fluctuations. More importantly, while it might sound counterintuitive, low oil prices don’t spell the end of the renewable energy. Far from it: Although economic logic would seem to dictate that rock-bottom oil prices would render renewables far more expensive than oil, that hasn’t been the case so far.
Sure, Americans are driving more miles than ever and enjoying that almost two-dollars-a-gallon fuel tank. This hasn’t put a major dent into the green energy sector. One reason is simple: renewables are overwhelmingly used to power the electrical grid (that’s what you tap into when you turn your TV on) but few are used in vehicles, according to a recent McKinsey study.
Of course, that’s almost exactly the opposite of the case when it comes to oil, which is used in less than one percent of electrical grid generation (coal, gas, nuclear and hydropower are still the largest sources), said McKinsey. That means that while low oil prices may be good for your wallet at the gas station, they’re not necessarily hampering the more widespread use of renewables.
Clean Energy Is Doing Surprisingly Well
While green energy stocks did plummet in 2014 and parts of 2015 at the height of the oil crash, they are currently rebounding, according to McKinsey’s analysis. The reason is simple: While oil prices are crashing due to increases in supply and demand along with speculation, renewables are becoming ever more efficient at generating power.
The examples are mounting. Wind energy has become 58 percent more efficient since 2009, while solar is expanding at a fast clip (albeit from a low base) and is becoming increasingly common on rooftops not just in the West but even in the developing world. The stability of renewables’ power supply is getting much better as well. The entire nation of Portugal ran for four days straight on renewables alone earlier this year, to much applause from sustainability advocates. It’s not just small countries like Portugal: The industrial powerhouse of Germany ran almost entirely on green energy on Sunday, May 15.
All these trends show that despite low oil prices, renewables are on the upswing, and not for superficial and unpredictable reasons like the notoriously volatile price of a barrel of oil. Increases in productivity and capacity are far more viable in the long run both from an environmental and market perspective.
Climate Change Poses a Real Threat to Fossil Fuels
The most important factor in this whole analysis of low oil prices is climate change. Why? Because it means that the fossil fuel industry will have regulatory challenges in the long-term that simply don’t exist for renewables. This is due to the incontrovertible scientific evidence behind climate change, which shows that manmade greenhouse gas emissions are slowly but surely warming the planet with potentially catastrophic consequences for global sea levels, agriculture and wildlife in the coming decades. You probably noticed that this May was the world’s hottest May ever, and that’s no coincidence.
Although the 2008 financial crisis and ensuing recession temporarily relegated climate change to the backburner, countries all over the world are now realizing that it’s finally time for them to get their act together. One way to achieve this is through national emissions caps, which means limiting the estimated amount of greenhouse gases a country produces every year.
These targets have been set — and partially achieved — since the 1990s in Western countries but they are spreading worldwide now too. China, which is now the world’s largest polluter, has pledged to hit peak emissions by 2030, although it did not specify what that peak level would actually be. Still, it’s a major move for a country with well over a billion people and tons of room to get richer — and thus implicitly produce more pollution.
The biggest threat looming over the head of fossil fuels, however, aren’t national emissions caps, but a carbon tax. A carbon tax simply taxes oil for the negative environmental effects it creates. U.S. President Barack Obama has suggested indirectly taxing carbon by levying a $10 tax per barrel of oil, for example.
Here’s why oil producers are terrified by a carbon tax. As noted finance and pop culture blogger Felix Salmon writes in Fusion.net, a carbon tax makes oil too expensive for consumers, but not producers, which means that the producers don’t enjoy the record profits that high oil prices enable them to collect. With a carbon tax, the switch from gas-guzzling vehicles to electric or gas cars, ride sharing and public transport would be massively catalyzed.
Carbon taxes, emissions caps and renewables are all related to climate change and are, not coincidentally, reasons the fossil fuel industry is worried. Even oil companies admitted internally decades ago that climate change caused by fossil fuels was a serious threat to the environment — but of course, they covered it up and bankrolled phony “denial” science claiming that global warming was a left-wing bluff.
That sort of policy is catching up to these companies, even if they still rake in tens of billions of dollars every year in pure profit. Low oil prices are dealing a heavy blow to the oil and gas sector, with behemoths like British Petroleum (BP) losing almost a quarter of their listed value since the same time last year.
Green Energy Is Here to Stay
Remember all these trends whenever you read articles claiming that low oil prices spell doom for renewable energy advocates. The truth is that clean energy is ultimately the way of the future. It’s plentiful, cheap and will last as long as the sun shines and the wind blows — a heck of a lot longer than estimated petroleum reserves worldwide.