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Low oil price hit renewables

Jasper SkyFebruary 12, 2015

Low oil and gas prices may persist for several years. That will have negative consequences for investment in renewable energy and energy efficiency. But it also presents an opportunity for carbon pricing, experts say.

Oil pump in Kuwait
Image: Getty Images/J. Raedle

Several populous countries - among them India, Egypt, Indonesia, and Ghana, among others - have provided subsidized fuel for their populations for many years. Now, thanks to the extreme drop in oil and gas prices over the course of 2014, these and other nations have moved to reduce or eliminate fuel subsidies. That will free up money for much more useful purposes, such as infrastructure and education.

That's one of the upsides of the current radically low global oil price, which in most respects is a threat to renewable energy or energy efficiency projects, said experts at a seminar on Thursday in Berlin, hosted by the German Renewable Energy Federation (BEE). The seminar was held to discuss the implications of low oil prices for the renewable energy sector.

"Politically, it's much easier to reduce subsidies in the current environment of radically lower oil and gas prices," said Gerard Reid, an energy sector financing specialist. "Subsidies aren't needed when the price of oil is low anyway."

Ground source heat pump
To meet CO2 emissions reductions targets, Germany will have to move away from fossil fuel heating of houses. But low gas prices are sending the wrong price signal

A golden opportunity

For the same reason, the recent radical decline in fuel prices presents a golden opportunity for governments in developed countries like Germany to introduce a carbon price on fossil fuel supplies, according to Joachim Nitsch, an senior energy systems analyst who spoke at the BEE seminar.

With crude oil prices down to the $50 per barrel range from over $110 per barrel just a year ago, there's room to put a surcharge of anywhere from $5 to $35 a barrel on oil - even so, the price of fuel at the pump would be lower than it was for the past several years until the precipitous drop in mid-2014.

Unfortunately, there's no sign that European governments are moving to take advantage of the opportunity, said Nitsch and other experts at the seminar. Yet without a substantial carbon price, investments in energy efficiency, especially in the housing sector - which represents 37.6 percent of energy end-use in Germany - will remain financially less attractive than continuing to burn gas to heat homes.

Solar rooftop heating systems, ground- and air-source heat pumps, insulation refits - all of these make little financial sense in the face of ultra-low fossil fuel costs, Nitsch said.

Very low oil prices lead to equally low gas and coal prices, because gas and coal supply contracts are often linked to oil prices, the experts said. For a world that must move away from fossil fuels for reasons of climate stability, that's a problem.

Electric vehicle recharging
A Europe-wide fast-recharging network would change the game for electric vehicles, and hugely improve European energy securityImage: dapd

Changed calculations

Gerard Reid said low oil prices are the result of two main factors, both of which could persist for several years. One factor is the boom in US shale gas and "tight oil". Much of the increase in total oil supply in recent years was provided by production of unconventional oil in the US and Canada. That has changed the balance of supply and demand - and hence prices.

The second factor is a change in strategy decided in 2014 by Saudi Arabia, a country Reid called "the central bank of the oil world". Saudi Arabia's enormous oil reserves and cheap production costs enable it to change the global balance of supply and demand.

For now, the Saudis have decided to keep pumping in an oversupplied market, and let the oil price fall. Their aim, according to energy analyst Steffen Bukold, is to drive high-cost producers like deepwater oil rig operators or shale-oil drillers out of the market. That will take some time - which is why the Saudis will likely pump enough oil to keep prices low for five years or so.

Fracking jobsite
US and Canadian shale oil production has been the second most important factor in driving oil prices down - after Saudi Arabia's change in strategyImage: Getty Images

Government action necessary

The take-home message: Low oil and gas prices mean government regulatory actions - ideally including a substantial and gradually rising price on carbon - are necessary to ensure the transition to a low-carbon energy future, and hence to a world in which climate disruption doesn't become too extreme.

But Gerard Reid sees reason for optimism in the pace of technological change. Half of the 90 million barrels a day of oil pumped each day are used for transportation fuels. Electric vehicle technology is coming of age; if there were a proper network of recharging stations in place, the market for them would grow rapidly.

Reid said the financing of such a network would be very much in the interests of the electricity generating industry, by creating a large new base of customers and an energy storage network composed of battery-powered electric vehicles.

How could an EV recharging station network be financed? One possibility might be for European governments to levy a modest carbon fee at the European Union level, on the order of a few dollars per barrel of oil, and direct the revenues from the tax into financing the construction of a Europe-wide network of fast-recharging stations.

The perfect time to do that would be now, when European governments are keen to reduce their reliance on oil supplies from geopolitically unreliable sources, oil and gas prices are so low that a carbon price of a few dollars a barrel would barely be noticed, and electric vehicle technology is ready for large-scale roll-out: Reid said battery costs are expected to drop by about 40 percent over the coming year, and continue their decline thereafter.

A virtuous circle could soon emerge in energy markets - if governments see to it that key enabling infrastructure is built.