The Impact of Oil Price Drops on the Fight Against Climate Change

oil-price-dropOver the past year oil prices have taken a huge plunge, reducing from $115 per barrel in June 2014 to $49 per barrel as of January 2015.

A mix of factors explain this situation: an oil price spike brought about over the last 10 years by soaring oil consumption in countries like China, led to the development of the shale gas and oil sands industry in the US and Canada respectively. This development was followed last year by a fall in the demand for oil in Europe, Asia, and the US, due to weakening economies and new efficiency measures, which led to an oversupply of oil. The issue finally culminated in November 2014 with a decision by the Organization of the Petroleum Exporting Countries (OPEC) to continue producing oil at the same levels so as not lose their competitive edge. OPEC’s decision caused the price of oil to tumble further, reducing from $80 a barrel in November 2014 to $50 in January 2015.

climate-changeToday, as oil companies struggle to continue exploration at current levels, national governments are presented with opportunities for policy reform, be it a carbon tax or a reduction in subsidies, that could reduce dependency on the fossil fuel industry and assist a shift to a clean energy economy that could help contain climate change. The general public is now scrutinizing national governments to see how their representatives stand up to the pressure applied by the leaders of the fossil fuel industry.

keystone-pipeline1In the US for example, a recent document released by the Environmental Protection Agency on the impact of oil prices reduction, confirms that lower oil prices mean that there will be added pressure in moving oil by pipeline to save costs of transport by normal freight such as train, which will in turn increase the amount of greenhouse gases emitted into the atmosphere. Although the country does not put price controls on fossil fuels, environmentalists point out that these oil companies receive tax breaks for exploration. A debate is even beginning about whether to raise gasoline taxes now to repair roads and bridges, as well as to damp demand for cheap fuel. In light of this, many see the decision of President Obama whether or not to construct the controversial Keystone pipeline as a test of his climate agenda. To find out more about the Keystone project and its impact on the US climate agenda please read our previous blog dated January 21 available here.

clean energyIn other parts of the world, governments with fossil fuel subsidies in place, could take advantage of plummeting oil and natural gas prices to slash these subsidies. Global subsidies amount to more than $540 billion a year worldwide, a sum which represents government funds (for both producer and consumer countries) that could instead go to social programs and other investments to help reduce greenhouse gas emissions. Some countries, such as India and Indonesia, have moved to cut or reduce fuel subsidies. In the United Arab Emirates, Sultan Ahmed al-Jaber, minister of state and chairman of Masdar, a company specializing in clean-energy technology, told officials at a regional energy conference in January that money saved from reduced subsidies is “money that can otherwise be redirected to improve energy systems and transform economies by creating jobs, stimulating economic growth and educating future generations.”

Oct-31-Energy-Matters-FotolLeading agencies on energy issues agree with this stance, seeking to increase the pressure on oil producing country to shape this transition to a green economy. Maria van der Hoeven, executive director of the Paris-based International Energy Agency stated at an energy conference in Abu Dhabi in December, that the oil & gas price drop was “an opportunity to put a price on carbon and slash fossil fuel subsidies.”

The decision to push for such reform remains a political one, subject to the national conditions of a given country. History shows that cutting subsidies can often lead to a political backlash, and they have already emboldened the opposition in OPEC countries (that produce 40% of the world’s oil), as has been the case in Kuwait. The way forward therefore remains an issue of education as to the long term benefits of a transition away from volatile and finite fossil fuels to diverse, reliable and renewable sources of energy

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