EXPLAINER: Why Shifting Oil Prices Won’t Deliver Results on Climate
After watching fossil companies abandon extreme oil and gas investments in the Arctic and the tar sands/oil sands over the course of a three-year global price crash, it’s tempting to worry—or look for some unsuspected silver lining—with prices for benchmark Brent crude oil back in the US$75 per barrel range.
But Oil Change International Research Director Greg Muttitt says any sense of a lockstep connection between oil prices and climate action is overdone: While prices aren’t completely irrelevant, he told The Energy Mix in an interview earlier this month, they won’t determine whether countries decarbonize in time to avert the worst impacts of climate change.
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“I don’t think oil prices are going to either save us or kill us, whichever way they go,” Muttitt said. “Whether we collectively stay within climate limits is another question, to which oil prices are relevant, but there are things we have to do, whatever happens to oil prices.” Different responses from the climate and energy community make sense in times of high oil prices or low, so “we try to adapt our strategy to the price environment,” he adds. “The oil majors do exactly the same.”
Pick Your Price Scenario
Following oil prices through industry publications can feel like a bit of a whipsaw: In the space of a day, certainly a week, you can see analysts take opposing positions on whether high prices or low are good news or bad for the industry, and indirectly for climate, based on assumptions that may not be stated and business interests that are usually barely visible.
The confusion only mounts when they try to predict where prices will go next—which they rarely seem able to resist doing.
Muttitt takes a more sanguine view, offering an iron-clad promise that prices will always do one of three things: Go up, go down, or stay the same.
“In the years I’ve been working on this, the one consistent pattern in the oil price is that the experts get it wrong every time,” he said. “The most common tendency is to believe the price will stay exactly the way it is now,” when change is the real constant. That’s partly because multiple factors—as well investors’ variable interpretations of those factors—determine the arbitrary value attached to a constantly-shifting commodity. When Brent crude hit $75 early this month, a Financial Times article [subs req’d] listed five driving influences: supply and demand; continuing efforts by OPEC and Russia to limit supply and drive up prices; geopolitical risks, from Donald Trump’s withdrawal from the Iran nuclear treaty to the collapse of the Venezuelan petro-state; whether hedge fund investors retain or sell off their fossil investments; and the rise of U.S. shale oil production.
Each of those big-picture items is feature article of its own. Tracking them is a full-time job and more. Trying to predict accurately how they’ll mix and match is pretty much a fool’s errand.
But the far more important consideration is that fossil price shifts don’t determine how quickly or effectively countries will respond to the climate crisis and decarbonize.
Fossils Know How to Win Either Way
Oil price fluctuations do shift the economic, strategic, and political landscape, Muttitt said. But crucially, there’s a potential win for fossils either way. When prices are low, “the oil companies go to governments caps in hand for subsidies, and often get them,” he said. When prices are high, “some difficult, risky, expensive projects like the tar sands get sanctioned.”
Which points to the question that anyone concerned about climate change is really asking about oil prices: What will it take to permanently drive down demand? Muttitt foresees some downward pressure in the 2020s, particularly from electrification. But even if the passenger fleet converts to electric vehicles very quickly, cars only account for 25 to 30% of oil consumption. So demand won’t shrink in a big way without massive electrification of truck fleets and some reduction in non-transportation uses of oil.
If oil did go into a permanent, structural decline, he continued, it isn’t clear how prices and markets would react. This year’s round of annual general meetings shows more investors paying closer attention to the business risk fossils will face as countries around the world get more serious about climate action. But it’s that kind of policy and political action—not decarbonization on its own—that will drive the pace of transformation that is needed.
“I’m quite certain that technological change driven by market competition won’t be sufficient to avoid dangerous climate change,” he said. “In order to achieve the Paris goals, for example, there will have to be political action and regulation to limit the fossil economy.”
Shining a light on fossil subsidies is one of the areas where Oil Change has made its mark over the last several years. As examples of the fossil industry’s overwhelming influence, Muttitt cites the highest-ever subsidies introduced in the United Kingdom in 2015 and 2016 in response to crashing oil prices, as well as the Alberta government’s decisions to scrap its promised review of fossil royalties and protect the industry from the cost of cleaning up its own orphan wells.
Those experiences and many others show that “if we think technology change or markets might potentially constrain demand enough to stay within climate limits, even then, we can expect governments to go further in bailing out fossil fuel interests,” he says. “That’s another respect in which the problem and the solutions are political more than technological or economic.” Whatever happens with oil prices, it’s still up to governments to drive a managed decline in fossil fuel production, and the job of climate and energy hawks to push for faster movement in that direction.