Carbon Tracker Initiative's Anthony Hobley argues that far from being a disaster for clean tech, low oil prices could aid decarbonisation efforts
The collapsing oil price to a new low of $45 a barrel, its lowest for six years, presents major opportunities for the green economy and the climate movement as a whole, but challenges too.
As BusinessGreen's James Murray argued last week, some of these challenges are significant. But it is important to recognise there are also sizable opportunities that come with low oil prices.
Let's consider some of these opportunities. The Carbon Tracker Initiative, which first coined the term the "carbon bubble", foresaw last year that any oil price slide would make many unconventional and high-cost oil projects uneconomic and risked wasting huge piles of investors' cash. In one of its landmark studies it identified $1.1tr of potential capital expenditure on projects in the next 10 years requiring a market price of over $95 a barrel to give shareholders a decent return. Reserves that have high extraction costs: Arctic, Deep Water and oil sands assets - some of the most polluting sources in terms of green house gases - were identified as potentially in danger of becoming stranded.
This is showing real signs of playing out as the oil price spirals: daily there are reports of project deferrals and cancellations. Norway's Statoil, the world's most active offshore Arctic explorer in 2014, for example, has relinquished three exploration licenses off Greenland's west coast; Chevron has already put its Arctic drilling plans on hold, and it's likely that Shell will be forced to follow suit. In the Canadian oil sands it is a similar story with oil companies cancelling or deferring billions of dollars' worth of projects. With many investment banks predicting that low oil prices will not rebound significantly in the short-term, the bloodbath can only worsen. The oil market collapse has effectively created a "live" stress test on fossil fuel development and the scale of project closures so far suggests many companies were not prepared for such a price slide.
All this offers green business and the climate movement a golden opportunity to exert maximum pressure on Big Oil, helping to crowd out damaging sources of emissions in the run up to the critical Paris climate talks in December.
It is also driving a new urgency amongst major oil investors to review their exposure to assets that are destroying shareholder value and putting pressure on asset managers to shelve capex spending, diversify portfolios and invest in cost-effective low carbon energy. The message is being heard loud and clear amongst some big pension funds. They are questioning development strategies, and in some cases curtailing investments. But it is also being heard by big influential institutions like the IEA, OECD and UNFCCC who recognise the risks associated with stranded assets, voicing them publicly and ever more loudly. Moreover, increasing constraints on emissions through growing regional climate laws, energy efficiency gains, improvements in technology, not to mention the slowdown in the Chinese economy, will only impact oil demand and prices further, speeding up the drive towards cleaner energy sources.
Extreme volatility in the oil markets impacts revenues and royalties and leaves oil companies demanding more subsidies to survive. In the wake of the price slide, North Sea oil and gas companies are reportedly to be offered tax concessions in an effort to avoid production and investment cutbacks and an exodus of explorers. It is all the more galling then that, despite the huge budget deficit, UK taxpayers are being asked to bail out the oil sector, which for years has failed to put in place a sustainable strategy resilient to changes in demand and price volatility.
By contrast, renewables exhibit falling costs, zero price volatility, lower carbon emissions and superior security of supply, as an indigenous energy source. Investment in clean energy through 2014 beat expectations despite the falling oil price. According to data just published by Bloomberg New Energy Finance, surges in investment in offshore wind in Europe, and solar in China and the US helped to drive the global clean energy total up 16 per cent to $310bn. China's investment was up 32 per cent, to a record $89.5bn alone. Solar was the biggest single contributor to the overall rise, because of huge gains on a cost-competitive basis over the last five years.
Furthermore, renewables are competing against cheap coal in many markets and solar is expected to reach grid parity in many parts of the world over the next few years. Our recent "Energy Access" report found that coal giant Peabody Energy Corp's assertion that coal can help to alleviate energy poverty in Africa and India is totally unfounded and smacks of desperation. In fact, exploiting falling costs of renewables like solar is the only answer for many rural communities lacking basic forms of energy. For example, our report found that a fraction (seven per cent) of Sub Saharan Africans without energy live in a handful of countries actually producing coal, making the cost of installing centralized grid infrastructure prohibitively expensive. Therefore, focusing on off-grid and mini-grid renewables - as solar costs fall and battery technology improves - are without doubt the most cost-effective solutions going forward.
It should also be noted that while experts say it is still too early to gauge the impact of an oil price collapse on the future of renewables they also say the advantageous impact of cheaper crude will be felt much more in road transport than in electricity generation.
One thing is clear, however. The oil price collapse, which follows a drop in global coal prices, shows that the global fossil fuel sector is presently one of the world's riskiest asset classes. Meanwhile, the benefits from investing in renewable energy remain as real as ever. These benefits include falling costs, and multiple social and environmental benefits which are increasingly front and centre of global policy concerns: less climate risk, less price volatility and cleaner air.
That bodes well for any much needed transformation to a cleaner energy future.
Anthony Hobley is CEO of the Carbon Tracker Initiative