The collapse in the price of oil leaves green business advocates with little choice: we need to find a better way to talk about climate change
And so, it continues. Oil fell below $45 (£30) a barrel yesterday morning, futures falling another 4.1 per cent on the back of fast-inflating US stockpiles, and indications from the United Arab Emirates that it has no intention of curbing production just yet. The oil price graph now resembles nothing so much as a cliff face or a Lib Dem leader's approval ratings. The analysts who singularly failed to predict this slump are now rushing to predict how long it will last and how low the price can go – we should be forgiven for questioning what qualifies them to keep making confident predictions.
You will no doubt have read much of the analysis detailing how the slump has been caused by US fracking or competition from clean tech or Machiavellian OPEC manoeuvrings (delete as appropriate). You will also have read about how the slump will either prove shortlived as supplies are trimmed and demand recovers, or an epoch-defining event as OPEC's influence dwindles, shale plays redefine the energy landscape, and clean tech leads to a permanent drop in fossil fuel demand. And you will have read how the oil price collapse is great news for green businesses as investors ditch unproductive fossil fuel assets and flock to cleaner alternatives, or terrible news for green businesses as cheap oil obliterates the financial rationale for low-carbon technologies.
The breadth of the spectrum of analysis on almost every aspect of the oil price slump – not to mention the manner in which many people's understanding of this phenomenon appears to be informed as much by their ideological world views as the changing nature of the market – again underlines the extent to which no one can really say with any confidence what will happen next. Once again we are forced to reach for the old Hollywood adage, nobody knows anything.
However, amid the recent avalanche of analysis, a handful of important points are in danger of being missed.
The first is that the green business community is in danger of hyping up the benefits that will come from a sustained period of low oil prices and underestimating the significant harm that could be wreaked on clean-tech firms.
There has been a tendency among green business commentators in recent weeks to highlight how oil and gas firms will suffer more from the oil price crash than their clean-tech competitors. This is undoubtedly the case. Much depends on the longevity of this period of low oil prices, but it is clear that if it continues for any length of time, the oil majors face a period of retrenchment, job cuts, and axed projects. The outlook for clean-tech firms that are supported by decarbonisation policies and are benefiting from falling cost curves is far more encouraging. But that does not mean clean tech firms can expect to be fully insulated from the challenges that come with having to compete with fossil fuels that are now nominally cheaper.
If the low oil price is sustained – admittedly, a big if – the short to medium-term implications for clean tech will prove significant and largely negative. The cost of clean energy will become more expensive relative to gas (or simply less competitive in those lucky regions where clean energy already undercuts fossil fuels). Meanwhile, electric car and energy-efficiency investments will all be left looking less financially attractive compared with recent years.
The policy implications of this new reality would be widely felt. Taking the UK as just one example, the promise to set wholesale prices for clean-energy generators through the new contract for difference regime becomes a lot more expensive if gas wholesale prices fall. If the government persists with its cap on the amount of funding available to support clean energy, which it will, fewer projects than previously thought will be able to be built with the budget. Controversial projects such as new nuclear, carbon capture and storage, and offshore wind developments will become even more contentious. Meanwhile, politically Labour is tying itself in knots this week explaining how its energy "price freeze" was always in reality a "price cap".
Some green campaigners have boldly and reasonably argued that the fall in the oil price offers an opportunity to introduce a more effective carbon price that businesses and consumers will be more likely to accept. You can't fault the logic, just as you can never fault the logic of proper carbon pricing. But can you envisage a mainstream politician today who has the nerve to take the cost of living get-out-of-jail-free card they have just been handed by the global oil market and then erode its impact with higher carbon taxes? Have you met George Osborne or Ed Balls?
Yes, a low oil price that continues into the medium term harms the oil industry more than the emerging clean-tech sector, but that does not preclude green businesses facing a period of weakened investment cases and policy uncertainty. This precariousness will be further fuelled by the manner in which virtually every mainstream political player in every oil-producing country in the world appears to remain wedded to prioritising short-term action to prop up the faltering oil sector over long-term efforts to engineer an end to the oil sector. Chancellor George Osborne provides Exhibit A.
The second key point is slightly more encouraging for green businesses and centres on the way in which clean energy offers a much more stable alternative to the demonstrably volatile oil price. The oil price will spike again at some point, we just don't know when. Consequently, just as the oil majors are attempting to argue that high-capital projects will still be needed in the future, it is clear that clean-energy developers can present precisely the same argument.
Plenty of businesses are happy to pay a current premium for the clean energy they use because they recognise the value of having long-term price stability. Even in a period of low fossil fuel prices this argument can resonate, particularly when you consider how oil price volatility can be contrasted with the falling price of renewable, and particularly solar, power. The past few months might have demonstrated that the goal of grid parity for clean energy is a moving target, but that does not mean clean tech firms can't reach it.
However, while the 'stability versus volatility' argument can work, it is abundantly clear that it is less compelling than the 'renewables are cheaper' argument, which has just taken a shellacking at the hands of oil price collapse. As ever, there is an unanswerable long-term argument for investing in renewables and there are reasons to remain confident they will prove nominally cheaper than oil, coal and gas eventually. But in the short term plenty of businesses will be focused on trying to work out how they can exploit low oil prices. Green firms need to recognise that reality and work out a marketing approach that can still appeal to customers who have just seen one of the financial triggers for switching to clean technologies disarmed.
The narrow financial challenges that low-carbon firms now face leads to the third problem presented by the oil price slump: the need for an even more sophisticated articulation of the merits of the green economy.
If the oil price remains in the doldrums, supporters of the green economy will have to expand upon some of the narrow economic arguments that have dominated green business discourse in recent years, and start talking more explicitly about climate change.
For several years a high oil price enabled the simplistic argument that cleaner technologies made more financial and economic sense than fossil fuel incumbents. A low oil price still requires an economic argument, but it is a more sophisticated one that draws heavily on the need to recognise the economic costs that come with the climate impacts, air pollution, and price volatility that result from fossil fuels, as well as the myriad benefits that come with genuinely clean technologies.
Clean energy is still cheaper than oil when you consider the full costs of fossil fuels. The biggest subsidy in the world remains the one handed to the fossil fuel industry that allows it to offload the bulk of its environmental costs onto society as a whole. In the absence of a meaningful carbon price and in the presence of a low oil price, green business supporters need to find a way to make this case. In short, they need to identify an approach for talking about climate change risks and the transformation they necessitate, regardless of what is happening to the oil price this month.
Here is the daunting reality that we all too rarely wrestle with. Oil, coal, and gas could be as free as the (often dirty) air we breathe and we would still have to stop using it. In fact, if global decarbonisation efforts are successful, the long-term trend for the oil price is towards $1 a barrel as alternative technologies result in an eventual collapse in demand. The oil price can plummet to historically low levels, but it will not make one iota of difference to climate science and the warnings that come with it. We need to find a way to leave these assets in the ground. Ultimately, the only way to do that is to deliver alternative technologies that are demonstrably better than fossil fuels.
The global effort to tackle climate change centres on the development of technologies that will allow future generations to ignore coal the way we now largely ignore the flint and bronze that first enabled the development of human civilisation. In this context, the vagaries of the oil price should be seen as a sideshow.
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