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.
