On Monday, oil prices saw their biggest one-day drop since 1991, driven down by coronavirus fears and a price war between Russia and Saudi Arabia. If we’re entering an era of really cheap oil, it’s worth asking what that could mean for climate change.
The traditional view is that a plunge in oil prices hurts efforts to cut greenhouse gas emissions, as people use more oil and disregard alternatives like electric cars. Fatih Birol, the head of the International Energy Agency, has warned that cheap oil may slow the transition to cleaner energy worldwide.
But there are also reasons to think the old rules may not apply this time, and that the climate impact of cheap oil doesn’t have to be so stark.
Cheap oil, for instance, has often depressed sales of electric cars. But nowadays, a large share of electric vehicle sales is being driven by regulations in places like China, Europe and California. Those aren’t going away. What’s more, battery prices have been quickly falling over time, which means that electric cars are steadily becoming more competitive with conventional cars, even if you ignore fuel costs.
“For most consumers, high upfront prices are the biggest thing holding electric vehicles back,” Colin McKerracher, head of advanced transport at Bloomberg New Energy Finance, said in an email. “Battery prices matter more than oil prices. If those keep falling, electric vehicle adoption will keep going up.” He added: “Automakers are unlikely to change their long-term plans as a result of fluctuations in the oil market. Electrification is here to stay.”
Generally, a drop in oil prices also leads to an increase in travel, as people take advantage of low prices at the pump or cheaper airfares. But that’s less likely to happen this time, since worries about the coronavirus outbreak are keeping many people at home.
One big question, said Amy Myers Jaffe, an oil expert at the Council on Foreign Relations, is whether the coronavirus outbreak could permanently alter people’s work and transportation habits as companies get more comfortable with remote work and videoconferencing, reducing oil demand over time. “It will be interesting to see if we see big structural changes once this crisis subsides,” she said.
Another dynamic to watch: The oil crash, which is putting a financial strain on drilling companies, could cause some companies to reconsider their plans to invest in low-carbon technology. Alternatively, some companies may decide that renewable sources like wind and solar are actually a safer investment in a world of unstable oil prices.
But the biggest wild card is how policymakers react to the economic slowdown that’s being driven by coronavirus fears. If countries like China try to revitalize their economy by subsidizing polluting industries like steel and cement, emissions could soar in the coming months. During a period of economic crisis, climate concerns often fade, many analysts have noted.
But there’s another scenario: Governments could seize this moment to enact new climate policies. Low oil prices are often a good opportunity to remove subsidies for fossil fuels, which have been increasing in recent years, or raise taxes on carbon dioxide emissions, since consumers are less likely to feel the impact.
“Policymakers may try to bail out the conventional energy system and continue on as usual,” said Michael Webber, chief science and technology officer at Engie, a French energy company. “Or they could try to scale back subsidies for fossil fuels, help retrain workers into cleaner sectors, and take the moment to try to address the climate problem.”