Don’t celebrate plummeting oil and gas prices. The crash won’t be good for renewable energy.
BY ALEXANDER ROZENFELD
Texas oil and gas companies are experiencing their most dire crisis ever. As countries have shuttered and industries slow from COVID-19, demand for oil and gas has plunged while supply from OPEC, Russia, and the United States continues to rise. Oil usually hovers around $40-$60 a barrel, but during this pandemic, prices are struggling to stay above $20. For some, the crash of the fossil fuel energy industry is a reason to celebrate. Such celebrations by the “oil is our enemy” crowd are premature. In fact, this crisis may become a huge setback for renewables and the energy transition for four important reasons.
1. Low oil prices will lead to bankruptcies and a lack of transparency
Oil companies going bankrupt does not mean they disappear, magically replaced by carbon-free alternatives. Quite the opposite: Bankrupt energy companies will drop from public markets, and the transparency that comes with public listings, undoing years of effort to make oil companies more publicly accountable about their activities. If sold to private equity firms, there is minimal environmental oversight, with no need (or interest) to maintain transparency and environmental risk management. In the unlikely case that companies shut down altogether, any future supply will come from countries with questionable accountability and transparency processes. This is important because much of the ESG (environmental, social, governance) progress, thus far, is due to shareholder resolutions requiring transparency for public companies, including the Task Force on Climate-related Financial Disclosures. Since 2015, the TCFD has created a framework for companies to signal changes, to report impact, and to publicize their plans to reduce GHGs. The gains from forced transparency have been substantial. Bankruptcies would destroy these initiatives.
2. Low oil prices mean low natural gas prices
Natural gas prices have been this low only twice in 20 years, in 1999 and 2016. Low natural gas prices make power cheaper to generate, helping many gas-to-power producers in the short-term and increasing the likelihood of new natural gas plant development. Now, we prefer gas to coal, and the good news is the pandemic has also seen a significant reduction in coal use globally. However, the more use of natural gas, the less incentive to transition to alternative forms of energy.
3. Low oil prices lead to cuts in renewable initiatives
Investment in novel carbon capture, utilization, and storage (CCUS) could be drastically reduced. CCUS investment was already low within the oil and gas industry. Now it’s taking a back burner to survival. We already see significantly less interest in, and ability by the industry, to invest in these areas from their innovation and R&D budgets. Even if bankruptcy is avoided, capital budgets will continue to be reduced, impacting any renewable initiatives and low-carbon programs planned for the next few years.
4. Low oil prices change our mobility choices
Shifting the focus to the consumer, prices at the pump are at record lows. This does not bode well for electric vehicles. When we all start driving again, there will be far more incentives to both drive more and to buy low fuel efficiency trucks, rather than fuel-efficient EVs or hybrids.
Ironically, stability is key
The collapse of fossil energy prices highlights a key paradox that threatens the movement to renewable energy. Swings in commodity prices and fossil fuel bankruptcies hinder the path to an energy transition. If we want to maintain our low-carbon energy targets and a successful energy transition, the global economy and domestic oil (especially gas) must recover. For this to happen and for renewables to win long-term, oil has to survive first.
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