How will cheap oil affect clean energy?

Over the last few weeks I’ve been trying to make sense of the debate around falling oil prices. A barrel (159 litres) of Brent crude oil, the main benchmark for oil trading worldwide, fell under 50US$ last month.

I found this infographic (click to open the original) that shows how oil prices, far from being just a matter of availability of the raw material, are regulated by financial, natural and political factors.

oil price

The chart shows the variation of oil prices over the past 30 years, ending in 2014 with 104US$ per barrel. Imagine a decreasing curve even steeper than in 2009, when prices dropped as a result of the financial crisis in 2008.

Now analysts have been wondering what the recent fall may mean for the fossil fuel industry and its stakeholders. For example shale gas, which in the past few years boomed as a cheaper alternative to oil, won’t be as competitive as before. Good news for the environment, as the controversial extraction technique used to produce shale gas, hydraulic fracturing or fracking, is known to have severe environmental impacts.

But cheaper oil also means cheaper petrol, so for example more and bigger cars on the streets.

Also, cheap oil seems to be damaging the clean energy industry, that was just recently starting to catch up with fossil fuels, thanks to subsidies, technological breaktrhoughs and high fossil fuel prices.

Last December, at the UN conference on climate change in Lima, I spoke with a few scientists and members of the private sector about how to promote the transition to a climate friendly economy. All of them stressed the importance of the cooperation between private and public sector. They believe that governments won’t be able to bridge the gap between the current carbon based economy and what’s needed to mitigate and adapt to climate change. The private sector has to step in with money and capacity for implementation, but a climate friendly industry there is need of an ‘enabling environment’.

In other words, investors won’t go for renewables if they have a cheaper and more profitable option.

But there are other factors playing a part, that are unique to the current socioeconomic context. For example, diesel is today less relevant in the global energy mix, so the development of renewables is not affected as heavily as in the past.

Big oil companies are cutting their investments, and though this could potentially reduce the availability of oil resetting the prices, some say this time recovery could be more difficult, due to the implementation of carbon pricing and incentives for clean energy development.

My conclusions so far somehow overlap with the starting point of this video (strongly recommended, very clear and informative) . The volatility of oil price affects the global economy in a such a complex way that drawing an ultimate conclusion on the benefit or damages of a new age of cheap oil would be misleading.

How this will affect clean energy progress will also depend on how long the prices will stay low, what type of incentives the international community will put in place globally as well as locally, what sanctions will be issued to discourage countries from relying on fossil fuels.

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