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In Depth

Energy
| 01/14/16

Are low oil prices good or bad news for the climate?

TCE

Financial institutions, economists and commentators have issued a raft of warnings on the effect of low oil prices on the economy and the reasons for the slump in prices, from a slowing Chinese economy to doubling of US domestic oil production. The commodity has been on a steady decline since summer 2014, dipping just under $30 a barrel this week for the first time since 2003 and may go as low as $18. The price of coal and of natural gas is dropping as well. But what effect will all this have on climate change? Is this bad news or good news?

Low oil prices can work to keep oil in the ground. Unconventional sources of oil such as the Alberta oil sands or Arctic oil and gas deposits become less attractive to energy companies because they are more expensive to extract. They need high oil prices to make such efforts worthwhile. And indeed, over the past year, we have seen a slew of projects shelved, especially in Alberta, which has been wracked by low oil prices, with thousands of lay-offs in the oil patch. Total E&P put its $11 billion Joselyn oil sands project on hold in 2014. Shell backed out of its Pierre River project in the same region last February, then withdrew from Carmen Creek inNovember, walking away from $2bn in booked assets. This could also makes pipelines such as Northern Gateway and Energy East much less viable. Meanwhile, many of the most easily extracted deposits have been exhausted.

So it’s good news? Not so much. Low oil, coal and gas prices both cut the cost of many goods and services and put more money in people’s pockets to buy things. It can encourage more use of fuel and dampen down the incentive to roll out energy efficiency measures. Vehicle sales are up, in particular carbon monsters such as SUVs and trucks. People tend to buy bigger cars and drive them more often and longer. They are less likely to take the bus or ride a bicycle as well. It can also make renewables less attractive both in the rich world and the developing world. While wealthy nations are steadily weaning themselves off coal, the resulting coal glut helps depress prices, leading to a “coal renaissance” in poorer countries. There is an irony in how increased use of renewables in one area can make the use of fossil fuels a bargain somewhere else.

So low fuel prices are bad because more fuel is used by consumers and high prices are bad because more fuel is found by producers. So what is to be done? Experts say that merely making clean energy cheaper than fossil fuels is not enough, but government needs to intervene to ensure that the latter is steadily taken out of the energy equation, whether through regulation, infrastructure, the removal of fossil subsidies or the pricing of carbon.

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