'A good time to tax fossil fuels': Experts react to plummeting oil price

Plummeting oil prices which even briefly dropped below zero yesterday look set to spark far-reaching, structural changes to global energy and financial markets that could open up major opportunities to accelerate the shift to net zero, experts have suggested.

With major global economies on lockdown in a bid to stem the spread of the coronavirus, demand for oil from transport and energy has taken a dramatic downturn, while low cost producing countries such as Saudi Arabia and Russia have made moves this year to slash their prices.

As a result, oil prices have plummeted and yesterday even went negative for the first time in history as global storage capacity for oil filled up, meaning in theory oil producers would have had to pay customers to take oil off their hands, rather than selling it at over $30 a barrel as they were just weeks ago.

Chris Stark, CEO of the UK's Committee on Climate Change (CCC), said that with little sign of global demand for oil returning to higher levels any time soon due to the ongoing Covid-19 crisis, he believed the "astonishing" low oil prices were likely to remain a fixture for some time ahead.

"When I look at the impacts [of the pandemic] playing out, I think the oil price change is the probably most significant when it comes to the long term climate questions," he said during a conference call organised by think tank Green Alliance this morning. "I think we are going to see a long period of lower prices, because we've got a straight forward issue of supressed demand, and I'm afraid I'm increasingly of the view that that's not going to change for some time."

He said one likely result would be to made investments in renewable energy far more attractive and boasting more competitive returns, which would "fundamentally change" the outlook of oil majors, more of which may now be looking more seriously at transitioning to net zero, following in the wake of announcements from BP, Repsol and Shell in recent months.

"Just a few weeks ago you might have been getting a 20 per cent plus return on oil exploration projects - that's gone and I don't see that returning now for some time," Stark explained. "That will fundamentally change your outlook if you're going to get six per cent perhaps on a standard renewables project. So I think you're going to see potentially at least, those companies that are interested in diversifying… prepared to take the hit in internal investment terms by moving and transitioning towards net zero infrastructure projects."

Stark also said he believed very low fossil fuel prices would likely follow for consumers this year which could deliver opportunities for ambitious green policies in the UK and beyond to accelerate decarbonisation.

The situation "does open up a question as to whether the government might wish to step in and use things like carbon taxes to ensure we don't see very negative impacts on the environment" he said, adding that "this is a quite a good time to introduce a tax on fossil fuels".

Also speaking during the event earlier, Dr Thomas Hale, associate professor of global public policy at the University of Oxford, sounded a note of caution on negative future contract oil prices, pointing out that it did not reflect the price paid to fill up cars or planes with fuel.

"It is a bit of a complicated financial instrument so we shouldn't over interpret the negative effect," he said.

But he warned that should low oil prices continue for a long time a number of higher cost producers - particularly in the US fracking sector - would not be able to survive in the long term. On the one hand, that could be positive for global climate action by taking away a major section of the US fossil fuel industry from the global climate conversation, but there remains a risk of the US government spending big on trying to bailout struggling fossil fuel firms, Hale said.

"It is a very critical factor, how all this plays out," he said. "The key variable is how long the oil price stays low globally."

More broadly, meanwhile, the current pandemic crisis and oil sector woes have highlighted ther resilience and long-term benefits of low carbon industries and activities by comparison, argued, Camilla Born, deputy strategy director in Cabinet Office's COP26 unit.

"It's been quite impressive to see some of the resilience of those investments in different markets around renewables and digitisation - and that really points to a suggestion that is where the future investment is," she added during the event. "That is evolving. It's not clear which direction it going to be going to. But I think we are in a different space to where we were in the last financial crisis, and so there are a whole range of better options when it comes to climate, so we are able to take that choice for a more sustainable path."

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