The utter collapse in oil prices over the past year and a half presents a unique opportunity for climate action, a temporary period in which measures to restrict the production and consumption of fossil fuels could be more politically palatable than at any other moment to date.
Oil prices have plunged more than 70 percent since mid-2014, from over $100 per barrel to just above $30 today. It is hard to overstate the magnitude of this crash. The last time oil prices were this low, the drumbeats of war were starting as Bush and Cheney prepared for the invasion of Iraq, which was followed by years of rapidly rising energy prices. It wasn’t until January 2016 that oil once again fell below $30. Not even during the depths of the financial crisis was oil as cheap as it is now.
But it won’t stay cheap forever. The drilling bonanza that crashed the market was fueled by debt, and drilling has come to a standstill with so many oil companies nearing bankruptcy. Just as subprime mortgages, spurred on by reckless lending, crashed the housing market, subprime drilling companies with access to an endless supply of credit flooded the market with oil.
The oil was never cheap, however. As the easy-to-reach stuff has largely run out, drillers piled into higher-cost ultra-deepwater and expensive shale. Fossil fuel companies can’t make money at today’s prices. That means prices will have to rise.
A crippling blow to the oil industry
BP just reported that it lost $6.5 billion in 2015, the worst performance in its history. ExxonMobil’s profits plunged by half last year, and other oil companies posted similarly dismal numbers.
And in a sign of future times when the financial markets realize these companies are sitting on unburnable carbon, many have downgraded their “proved oil reserves,” which is a technical way of saying that they cannot produce some of those reserves at today’s prices, and thus they cannot be counted as assets.
ConocoPhillips, for example, erased 464 million barrels of proved reserves, or about 5 percent of the total oil it has under its control.
Rapidly deteriorating financial positions are forcing companies to dramatically scale back drilling. The industry has put off around $230 billion in spending on at least 63 major projects, which were supposed to yield 3 million daily barrels of oil production by 2026.
For the moment, at least, low oil prices are keeping oil in the ground.
Too big to fail
In the past, extraordinarily high oil prices have caused global recessions. Now, the financial markets are growing worried that low oil prices might do the same.
That’s because in some countries, oil has become too big to fail. And just like the massive banks in 2008, oil companies and even oil-producing countries want bailouts.
Azerbaijan, the corrupt petro-state on the Caspian Sea, is turning to the IMF and the World Bank as its oil-dependent economy hollows out. Nigeria is also seeking emergency aid, although it hopes to avoid the IMF because of bad experiences with onerous loan conditions in the 1980s.
In the UK, the conservative Cameron government pledged £250m to “prop up the North Sea oil industry,” according to the Financial Times, and the dying sector is seeking a further £3 billion in funding. This comes after the government slashed taxes last year, saving the oil companies £1.3 billion over five years.
Brazil has also flirted with the idea of providing a bailout to the highly indebted and incredibly corrupt state-owned Petrobras.
Of course, this is one of the risks of building an economy entirely dependent on oil for economic growth.
A once in a generation opportunity
The oil bust is a policy opportunity, one that will either be exploited by the fossil fuel industry or climate activists, who can use it to ensure that carbon stays in the ground over the long-term.
The fossil fuel lobby realizes this all too clearly. In fact, it has already taken advantage of the price crash to overturn the decades-old, once untouchable US ban on exporting crude oil, ramping up “an aggressive, multi-year lobbying campaign” in Congress that only caught fire last year as prices nosedived.
As part of a year-end budget deal reached in December, just days after the UN climate summit in Paris produced an agreement, fossil fuel proponents tucked in a provision that fully liberalized the oil trade, allowing crude to be shipped overseas. The ban had been in place forty years but was quickly undone. The first shipment left Texas on New Years’ Eve, headed for Italy.
The bill also extended tax credits for solar and wind, which will help accelerate clean energy deployment, something Democrats trumpeted. But exports will lead to more drilling. Oil Change International called it a “disaster for the climate.”
Turning the tables
But cheap energy can also be seized in climate policy. Low prices for coal have battered coal mining companies, helping to neuter the coal lobby. In January, President Obama indefinitely halted all new coal mining on federal lands with only a whimper from the coal industry and its allies in the Congress.
Now, the White House is following that up with a plan to tax oil in order to fund clean energy and mass transit. The idea, part of Obama’s latest budget proposal, is a good one: tax oil at $10.25 per barrel, and use the $30 billion raised each year to fund high-speed rail, light rail, buses, electric car charging stations, and research into other technologies to reduce carbon emissions. It would be a very large down payment on transitioning away from the fossil fuel economy, dependent on highways, parking lots, big cars, and suburban sprawl.
While the plan has virtually no chance in a Republican Congress drowning in oil money, the outgoing President is operating with a degree of freedom—and displaying a boldness—that he didn’t have several years ago. And with oil prices at their lowest levels in more than a decade, the estimated 24 cents per gallon that the industry would likely pass onto motorists would hardly be noticeable.
“Ten years from now, 15 years from now, 20 years from now, we’re going to be in a much stronger position when oil starts getting tight again, prices start going up again. We will have further weaned our economy off of dirty fuels,” President Obama said at a press conference on February 5. “What is also important is that we use this period where gas prices are low to accelerate a transition to a cleaner energy economy because we know that’s not going to last.”
A clean energy future is inevitable. It’s just a question of when.
In one sense, cheap oil is bad for the climate—look no further than the record 2015 automobile sales in the US, mostly gas-guzzling SUVs and light trucks.
But cheap oil will not derail the transition to clean energy. Even in 2015, when oil prices crashed to their lowest levels in more than a decade, renewable energy made unbelievable progress. Wind and solar accounted for 68 percent of all new electricity capacity in the US in 2015, the second year that these technologies exceeded gas and coal for new power plants.
It’s a trend that is expected to continue. But even this rapid pace of change is wholly inadequate to prevent catastrophic climate change. The oil bust provides a once-in-a-generation opportunity to ratchet up the ambition.