Cheap Oil Could Save the Planet

Sounds crazy, but analysis by financial think tank Carbon Tracker shows how it works.

By Mitchell Anderson 31 Jan 2015 | TheTyee.ca

Mitchell Anderson is a contributing editor to The Tyee. Find his previous Tyee stories here.

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Drop photo via Shutterstock.

Cheap oil could save the planet. Sound crazy? Consider this: carbon emissions depend on extracting fossil fuels from the earth at a profit. Most of the world's cheap oil is long gone, and finding new supplies is becoming very expensive. If prices don't stay high the economics of new projects collapses, which just happened in spectacular fashion.

Posteriors are puckering throughout the petroleum sector as billions in book value disappeared in a matter of months. While prices may rebound in the future, there are reasons to believe this is part of a longer trend.

Between 2000 and 2012, capital expenditures by the 11 largest oil companies increased over five times yet their production remained flat. This declining profitability of the oil sector was masked by a four-fold increase in the price of Brent crude over the same period. But commodity prices change much faster than long-term fixed costs, leaving many investors in what seemed like a blue-chip sector wondering where their money just went.

These market forces have huge implications for climate change, far larger than any public policy intervention so far. According to the scientific community, the world can add a maximum of 900 gigatons (Gt) of additional carbon dioxide to the atmosphere by 2050 and still have about an 80 per cent chance of avoiding warming more than two degrees Celsius -- a temperature threshold considered a dangerous climate tipping point.

About 40 per cent of this global carbon budget, 360Gt, is projected to come from the oil sector. But just because oil is found under the ground doesn't mean it's profitable to go and get it. The decision to develop any given deposit is driven by capital markets, which are obviously less worried about climate change than turning a profit. And as easy oil reserves are exhausted, profit margins go down, risks go up, and billions in sunk costs chase ever more marginal projects.

A report published last year by the Carbon Tracker Initiative (CTI) plotted remaining reserves all around the world against the global oil prices needed to develop them. The results are remarkable.

Their carbon cost curve shows that if the Brent crude price stayed below $60 per barrel, oil companies could not even cover their costs developing deposits which in total would push global emissions past the limit of 360Gt of carbon dioxide by 2050.

So is this the price that could save the world? Not quite. Sixty dollars per barrel is only a break-even amount that would pay projected costs for exploration and development. Companies also need to make a profit and dispense dividends to their investors, meaning that the long-term price required to prevent potentially disastrous oil emissions appears to be anything below $75 per barrel.

While the Bank of Canada claims dropping oil prices are ''unambiguously negative'' for the Canadian economy, they appear to be unambiguously awesome for avoiding climate catastrophe.

Besting Kyoto

Just six months ago, the price of Brent crude was about $110 per barrel, a price that would profitably produce about 500Gt of carbon by 2050. Now it is less than $50, which would only produce 180Gt over the same period. If prices stayed where they are, the world would possibly avoid some 320 billion tonnes of carbon emissions by 2050 in precluded production from uneconomic oil fields.

To put this in perspective, that is 25 times larger than reductions the Kyoto Protocol was supposed to achieve if it had worked (it didn't) and 180Gt below the oil emissions limit scientists say we need to avoid a world with more than two degrees of warming. Economic turmoil aside, the global commodities market just served up massive progress on an issue in desperate need of some good news.

Seen through this lens, a key measure of our success in controlling carbon emissions should be keeping the price of oil low. And while the main driver of the current slump in prices is the current glut of supply, it's important to realize that almost every policy intervention to avert climate disaster is directly or indirectly aimed at lowering the global price (and profitability) of fossil fuels such as oil and coal.

For instance, carbon pricing is intended to prevent companies from using the atmosphere as free dumping ground for CO2, reducing global demand. Since a carbon tax was introduced in British Columbia in 2008, per capita emissions fell by 17.4 per cent while they rose in the rest of the country. Economic growth was unaffected in this period and taxpayers actually saved $500 million through other tax reductions.

Likewise, vehicle emission requirements are already significantly reducing U.S. oil demand, which peaked 10 years ago and have since fallen by almost 10 per cent. The Obama administration increased long-stagnant vehicle standards in 2009, requiring automakers to average 35.5 miles per gallon by 2016. New standards taking effect next year will further increase fuel economy by another 50 per cent by 2025.

While carmakers fought many of these changes tooth and nail, the changes are projected to save consumers $8,000 in fuel costs over the life of a new vehicle and further reduce U.S. oil demand by more than two million barrels per day.

The coal example

But doesn't cheap gas mean that people just use more of it? Not really. While there is a weak economic link between declining prices and increasing consumption, key producers like Saudi Arabia are in fact fretting that slowing growth in Asian markets and already-peaked demand in developed countries will lead to a long-term decline in the world's appetite for oil.

And won't falling oil prices torpedo the nascent renewable energy sector? Perhaps in the past, but it's not so nascent anymore. Deutsche Bank recently released a study showing that solar generation costs will match or beat conventional fuels in 80 per cent of global markets in two years.

And because oil is primarily a transportation fuel, the bank believes ''oil prices do not have a material impact on solar demand.'' Their analyst Vishal Shah added, ''We believe the trend is clear: grid parity without subsidies is already here, increasing parity will occur, and solar penetration rates are set to ramp worldwide.''

These market changes, along with conservation efforts and air quality standards, are leading to a collapse in the global price of coal, which has dropped two-thirds since 2008. CTI released another report documenting the increasing risks to investors in this sunset industry, showing the break-even global price of thermal export coal is around $75 per ton. It is currently below $50, imperiling more than $100 billion in capital expenditures.

More than half of global coal production is now no longer profitable and the long-term prospects for investors in that sector look decidedly grim. Consumption peaked in Europe in 1987, the U.S. in 2005, and is already flat-lining in China, a country increasingly concerned about famously wretched air quality.

Meanwhile, the cost of renewable generation is dropping exponentially and recently eclipsed the economics of imported coal-fired electricity in India -- a country that has been touted as the next big growth market for the world's dirtiest fuel.

Eroding investor confidence

Like coal, the oilsands industry is looking at a hard landing according to the researchers at CTI. Of all global investments in expensive oil, nowhere is more exposed to collapsing prices than Alberta, with fully $400 billion in capital expenditures to 2025 that require market prices above $95 per barrel. But Alberta is certainly not alone. The authors calculated that risky oil investments such as deep water drilling, those in the Arctic, and shale oil will become stranded assets totaling $1.1 trillion if oil stays below $95.

Bear in mind that the fossil fuel industry still enjoys $550 billion in subsidies -- four times the support provided to the renewable sector. Should countries shift this public funding to clean energy or agree to binding global emission targets, this will only further increase the risk to fossil fuel investors.

The recent drop in oil prices is of course not entirely related to decreasing demand, and prices are bound to bounce back as more expensive supplies go offline. That said, oil and coal production are driven by investment and many of those investors are likely much more gun-shy about keeping their money in an increasingly risky sector. This might be good news for both their pocketbook and the planet.

Will cheap fossil fuels save the world? It might be the only thing that can.

Scientists believe 80 per cent of the world's coal reserves, half of the natural gas and one-third of oil deposits need to stay in the ground if we are to avoid climate catastrophe. International treaty efforts have so far been a bust. The most formidable force preventing ever more dangerous amounts of carbon from seeing the light of day might be the eroding confidence of investors that there is money to be made digging it up.  [Tyee]

Read more: Energy, Environment

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