'Nodding-donkey' oil wells at sunset

+ Extended periods of low oil prices will help to drive the adoption of low-carbon energy.

You might be forgiven for concluding that the lowest oil prices in 12 years would be disastrous news for the environment, encouraging over-use and creating extra pollution. But I want to argue that perhaps the reverse is true, and sustained low oil prices could hasten the transition to a low-carbon future. 

For those working in the world’s oil industry, recent years have been an anxious time. For various geo-political reasons the price has been on a continuous downward trend, causing job losses and macro-economic difficulties for countries highly dependent on oil revenue. With the price so low and corporate losses so high, investment in new oil prospects has all but come to a halt. But this leave-it-in-the-ground-for-now decision provides an opportunity for renewable energy to grow.

Even if the price ‘recovers’, the future looks difficult for oil producers. Assume we’re at the point where the current excess oil glut has been consumed, demand increases and the price of oil recovers to around $80 a barrel. The industry will somehow have to expand supply but from a position where they’ve lost the workers, infrastructure and profit to pay for it. And experts predict remaining viable sources of oil will only be found in increasingly hard to reach locations, adding further costs. 

For big businesses like LEGO, IKEA and Google  this picture of ongoing volatility provides another motivation to do things differently, their own large investments in renewables are part of that thinking. For those of us that advise clients on future risks, oil price volatility is becoming a pivotal issue affecting the built environment, the codes that regulate it and ongoing operational costs for end-users. 

The global, renewable trend

Global demand for energy is still growing, particularly in developing economies like China and India. But faced with the need to expand their energy generation capacity and the ongoing volatility of oil prices there’s a growing sense that the smart choice might be to opt for low carbon generation instead. There is also a knock-on effect of these investments, like China’s support for solar and wind power, creating cheaper, exportable renewable infrastructure for other nations to consume. 

As the cost of low-carbon energy generation falls, oil prices will need to rise sharply before those who got their fingers burnt reinvest in high-carbon exploration. Low-carbon energy production has been decoupled from the price of oil.  

In this new era investors across the world are likely to become increasingly nervous about putting new money into oil and other fossil fuel based assets. Renewables look like a better long-term bet, investment which the IEA estimates will be double that of fossil fuelled infrastructure between now and 2035. In short, investment in oil looks much higher risk than low-carbon energy. 

For these reasons, I believe that extended periods of low oil prices will in fact help to drive the adoption of low-carbon energy.