LONDON: The falling cost of oil is highlighting how stable renewable energy prices are, and could help trigger low carbon growth if governments use the opportunity to reduce fossil subsidies and drive clean energy investment.
Global oil prices had been fairly stable between 2010 and 2014, fluctuating at an average of US$110 per barrel. But this stability came to an end by June 2014, when crude oil prices steadily and then sharply declined, more than halving to reach US$52 per barrel this month.
As with any product subject to changes in the market, oil price is determined by a balance between levels of supply and demand. The recent shift is due to an increase in oil supply and decrease in its demand.
Image: Spot price of Brent crude oil as of January 5, 2015 - courtesy of Joss Fong/Vox
POWER SHIFT
The dip in demand is partly due to the economic crisis in the EU zone, combined with new energy efficiency measures and the ongoing switch from fossil fuel to low carbon energy sources.
But it is also down to exploitation of shale fossil fuel reservoirs in the US, which has dramatically increased oil production. Driven by high oil prices, many American companies supported the controversial oil and gas drilling technique known as hydraulic fracturing, or fracking. Fracking has introduced 4 million barrels of crude oil per day into the global energy marked since 2008.
At the same time, the slowing of difficult geopolitical situations in many big oil-producing countries such as Libya and Iraq has added an unexpected amount of oil to the market.
Also, OPEC countries – a group of the most influential oil-producer nations in the world – decided not to decrease their oil production levels as a measure to drive oil prices back up.
This all means oil-importer countries such as China, India, Japan and the EU are expected to experience a net benefit from cheap oil. But the effect on the US economy is still unclear; the US shale gas industry may feel the pressure because the cheaper oil is from conventional reservoirs that are easier to extract from.
RENEWABLE ENERGY IMPACT
While it may seem like a fall in oil prices should impact the low carbon energy sector, oil is not actually used for electricity production as much as it used to be. According to the International Energy Agency, the share of global power generation covered by oil resources has decreased from 25% in 1973 to under 5%.
A new report by the International Renewable Energy Agency even says the cost of generating renewable energy is now equal to or below the cost of fossil fuels in many parts of the world, and will remain financially competitive even if oil prices remain low.
Clean energy technologies such as solar or wind are now very well established and have secured a safe share in the electricity market. According to Bloomberg New Energy Finance, during the period of falling oil prices, renewable energy investments increased by 16% in 2014, reaching US$310 billion - the first growth registered since 2011.
The oil crisis also highlights another critical advantage of renewables over fossil fuels: prices of low carbon energy are comparatively stable and unlikely to fluctuate as much as oil.
Coupled with the growing awareness of the threat of climate change, governments and policymakers are now putting in place a series of legislations and binding targets to secure regular investments in the low carbon energy sector.
LOW CARBON ROADMAP
Subaskar Sitsabeshan, Project Manager at The Climate Group, said: “The Intergovernmental Panel on Climate Change has categorically outlined that unexplored fossil fuels ought to be left in the ground in order to tackle climate change. Ironically, falling oil prices are helping achieve this, as challenging explorations in the deep sea and Arctic are becoming economically unsustainable with falling oil prices.
“As oil prices react with the global market in a myriad of complex ways, it is too early to analyze the full impacts of plummeting oil prices. But it is clear that renewable energy is no longer a costly alternative to competitive technology. The energy market dynamics have changed in the 21st century. Driven by steep declines in cost and acceleration in technology efficiency, renewables have established a strong market that is capable of weathering the global oil price storm. This is what makes the economic proposition of renewables unique and compelling.
“Governments should take advantage of this window of opportunity by lowering fossil-fuel subsidies, while putting together a roadmap for low carbon energy generation and energy efficiency, which would be a winning strategy for a prosperous low carbon future for all.”
Last week The Climate Group hosted an event at the World Future Energy Summit to share a new report from our campaign RE100, in partnership with CDP, IRENA and We Mean Business. Speaking at the event, Bloomberg New Energy Finance Founder Michael Liebreich pointed out investment in renewables has jumped 16% owing to several business benefits - including the fact renewable energy costs are all upfront, and that they offer a new option in the face of fluctuating oil prices.
The clean energy markets analyst said: “Buying energy from the grid is ultimately more expensive long term. With the decrease in oil prices, investors are concerned about the long-term performance of oil and gas, and they are looking for new opportunities. [...] What I like about RE100 is the focus on demand side generation. We need collegiate solutions like this which work out the demand and then start backwards on the solutions, starting with renewables first.”