Cheaper oil will only increase our petro-dependencyby Paul Bledsoe / January 21, 2015 / Leave a comment
Good economic news, at last. The 50 per cent freefall in oil prices is a huge “shot in the arm for the global economy,” as the International Monetary Fund put it, boosting worldwide spending and employment everywhere but petro-states. United States growth has hit a 10 year high to an annualised 5 per cent; Americans will save an average of $550 per household from lower prices in 2015 alone. In the UK, cheap oil pushed inflation down to 1 per cent, below wage growth (1.6 per cent), so beleaguered workers are finally making slight gains in real terms, with total employment reaching new highs and retail sales booming.
Geopolitical mavens seem satisfied that low prices have undermined the Organisation of the Petroleum Exporting Countries’ long-held pricing power, as member states battle for market share amid declining revenue, while exerting extreme political pressure on oil-soaked regimes from Moscow to Tehran to Caracas. And prices may fall further and stay lower as structural elements in the global oil market—softer demand in Asia, more efficient cars, and desperate oil-funded governments pumping like mad—seem to suggest.
Amid such unrelieved blessings, is there a fly in the ointment anywhere? Can all the news be good? Of course not.
Cheaper oil reinforces the very habits of petro-dependency that put the world at the mercy of oil sheiks in the 1970s, and continues to make our economies vulnerable to oil price volatility and price spikes. Every major global recession for the last 40 years has been preceded by a large run-up in oil prices. Oil revenue also funds terrorism and autocratic regimes the world over, preventing diversification of many developing economies while exacerbating western trade debt.
These economic and geopolitical concerns prompted industrialised nations to pursue counter-measures—auto efficiency mandates, oil taxes, ethanol subsidies—over the last four decades, but these policies have only marginally reduced oil dependence and vulnerability to price spikes. The US, for example, still relies on oil for more than 90 per cent of its transportation needs, with figures nearly as high in many other nations.
But under what possible circumstances could consumers, governments and investors really be convinced to leave a commodity as valuable oil unused?
As if this weren’t enough, urgent concerns over global warming have thrown the greatest new fuel onto the oil addiction fire. The International Energy Agency and others estimate that the world must leave two-thirds of known fossil fuel reserves—oil, natural gas and coal—in the ground unused or risk catastrophic climate change.
But under what possible circumstances could consumers, governments and investors really be convinced to leave a commodity as valuable oil unused? Only one—a world in which cheaper, cleaner substitutes for oil were widely and readily available. And that’s where lower oil prices make the wicket much stickier.
While oil prices remained both very high and unusually stable, averaging more than $100 a barrel from 2009-2014, a global wave of investment in oil substitutes like biofuels and electrification of transport came about even in the midst of a weak global recovery and newly risk-averse private capital markets. Many of these investments were spurred also by government subsidies, as well.
But the plunge in oil prices, especially if it lasts for several years, could drastically undercut investment around the world in deploying and developing alternatives for oil. Indeed, early evidence for the second half of 2014 suggests cheap oil caused significant declines in demand for electric vehicles and investments in biofuels, even as consumer thirst for gas-guzzling SUVs surged.
What does cheap oil portend for gaining a global agreement through the United Nation to cut greenhouse gas emissions in Paris next December? Ironically, the drop in prices could ease the negotiations themselves and make a deal more likely. Yes, oil use and resulting emissions will likely rise marginally, but the reduction in energy costs could make most governments, concerned with short-term budget issues, less squeamish about funding other measures to decarbonise their economies, especially in the electric utility sector which accounts for more than 40 per cent of global emissions, as opposed to transport’s less than 30 per cent. The drop in oil costs is likely to increase already strong pressure to cut or end coal use as the best chance to reduce greenhouse gas emissions.
But oil price volatility is destructive to the climate in less obvious ways. The run up in commodity prices, including oil, led to a threefold loss over the last decade in vegetation in the 40 per cent of the Amazon that is not in Brazil, as investments in oil, gold and soy or palm oil planting (some, ironically, for ethanol) have ballooned. Now that prices have collapsed, governments dependent on revenues from extractive industries are easing environmental restrictions still further, threatening yet more rainforest which is the world’s largest carbon sink and therefore a critical bulwark against climate change.
All of this suggests that the hodge-podge of half measures the world has undertaken over the last four decades has not and will not break the continued oil dependency, or stop the volatility in oil prices, let alone dent the nearly 100m barrel a day global oil market. Only high, widely-adopted carbon taxes, combined with government infrastructure spending to catalyse a revolution toward electric transport powered by renewable energy, and supported by breakthroughs in electricity storage, could break the world’s profound oil addiction. (We might look more to China to lead such a revolution than politically gridlocked and polarised America or austerity-bound Europe). Alternatively, a stunning new low-cost biofuel breakthrough could change the game, but we’ve been promised such miracles before. And even in those unlikely scenarios, deployment of alternatives to displace a 150-year embedded oil infrastructure would take decades.
The UN process of accounting for greenhouse gas emissions itself, determined in the 1990s when dreamers in Brussels expected a global carbon tax to emerge quickly, exacerbates the problem and secretly rewards oil exporters. Emissions of greenhouse gases are accounted for not on a value added basis, including where oil, natural gas and coal originate, but only at the point of combustion; that is, emissions are fully and only charged against those who burn them, including of course the great majority of nations who are fossil fuel importers. This amounts to a vast hidden subsidy to fossil-rich countries like Russia, the US, Saudi Arabia, Qatar, Iran and Canada.
For all of these reasons, we are likely to remain oil junkies, even as the world warms. No wonder environmental campaigners are so focused on cutting coal use, instead.