Explainer: Why $100 oil could hurt the energy transition more than it helps
The surge in crude oil prices past $100 a barrel has raised a big question: Will this latest spike in the notoriously volatile oil market help to speed the global transition from fossil fuels to cleaner energy sources to fight climate change?
The answer is probably not.
On the one hand, energy analysts say, soaring prices for gasoline, diesel and other products made from crude oil will drive cost-conscious consumers more quickly into electric vehicles and boost investment in competing clean technologies like hydrogen.
But at the same time, these high prices will also drive more drilling of oil and gas around the globe, as fossil fuel companies rush to cash in, sowing the seeds for the boom to turn to bust. That will make oil abundant and affordable again.
That is a pattern that the world has seen repeatedly in the oil age, and one that has punished clean energy investors harshly in the past.
Here are some of the arguments on either side of the debate:
When fossil fuel prices rise, consumers start to take electric vehicles and clean energy alternatives more seriously – not just for their environmental benefits but in hopes of eventually saving cash. It is a scenario that played out after oil nearly broke $150 a barrel in 2008, giving a boost to electric vehicle sales.
Global sales of electric vehicles are growing, particularly in China and Europe, and to a lesser extent, the United States.
And the Paris-based International Energy Agency, the industrialized world’s energy watchdog, has said rising oil prices could increase the pace of electrification of the transport sector and also accelerate the transition to renewable power sources like solar and wind, whose costs have dropped in recent years.
But at the same time, sales of gas-guzzling sports utility vehicles in 2021, a year of steadily rising oil prices, were on track to hit 45% of global car sales, which would set a record in both volume and market share, according to the IEA.
That SUV demand canceled out the efficiency gains of EVs and has raised questions about the degree to which high oil prices influence the transition.
Analysts also point out that cars and trucks only burn about 20-25% of the world’s petroleum, with other sectors such as manufacturing, marine transport, aviation and agriculture making very few gains in fuel efficiency.
“We have not seen any sign of energy transition yet,” in those sectors, said Claudio Galimberti, an analyst at Oslo-based consultancy Rystad Energy.
HIGH PRICES SPUR DRILLING
There is another dynamic at play. For decades oil has been caught in a boom and bust cycle: High prices spur investment in oil and gas drilling which, in turn, leads to lower prices that increase demand for oil. There is little reason to think this time would be any different.
In the United States, for example, the world’s largest oil producer, drillers are already preparing to boost output. U.S. oil production is expected to soar next year to an all-time high above the 2019 record of 12.25 million barrels per day before peaking at 13.88 million bpd in 2034, according to the U.S. Energy Information Administration.
High prices would only accelerate this trend, not slow it.
Most of the world’s oil reserves, meanwhile, about 65%, are controlled by national oil companies fully or partially owned by state governments.
The governments of Saudi Arabia, Russia, Iran and Iraq all quickly get richer when oil prices rise because they are among the world’s lowest cost producers of crude, a trend researchers say deepens commitments to the petro-economy.
“High oil prices prolong the idea even with the most high-cost producers among the national oil companies that they can survive the energy transition, rather than work on pivoting away from oil into clean energy,” said Paasha Mahdavi, a political science professor at University of California, Santa Barbara.
They also reinforce the notion that reinvesting the society’s wealth in oil is “optimal for balancing government budgets today and in the future,” he said.
There is some nuance, though: Saudi Arabia, for example, is leading an effort to generate hydrogen produced with green energy like wind and solar at its mega city of the future NEOM, a project that it is funding with petrodollars.
“Higher oil prices do allow low cost petro states to continue making investments in some of these decarbonized solutions, but only among this small group,” said Mahdavi.
VOLATILITY KILLS COMPETITION
This tendency to meet high prices with increased supply leads to another problem for clean energy: volatility.
Rapid swings in prices make it hard for investors to plan and can even kill some alternative energy projects, said Deborah Gordon, who leads the oil and gas solutions initiative at RMI, a Colorado-based research group on energy innovation and efficiency.
“The much bigger risk for the energy transition is volatility,” Gordon said. “It’s not high prices or low prices, it’s this ongoing shift.”
Reporting by Timothy Gardner; editing by Richard Valdmanis and Marguerita Choy
This article was originally published by Reuters.