The first part of this blog looked at what lower oil prices mean for clean energy—and the short version is that clean energy is going to be just fine. (In fact, even more than fine, as new data about the clean energy sector’s 2014 performance confirms.)
Today’s post starts from the other side of the equation, taking a look at at what clean energy means for oil prices.
More Climate Action = Lower Oil Prices
Science has made it abundantly clear that we need to burn fewer fossil fuels if we want to avoid serious climate disruption. So tackling climate change means finding alternatives to the coal, oil and gas we use today to drive our cars, heat our homes, and power our economies.
The more action we take to deal with climate change, the smaller the world’s appetite for oil will be. And we all know that when demand goes down, prices fall.
Under the International Energy Agency’s “450 Scenario,” which features climate action strong enough to keep global warming below 2°C, a barrel of oil will sell for USD$100 in 2040. If we instead continue with current policies, the Agency projects that same barrel will sell for significantly more: USD$155.
Yes, 2040 is a long way away—but lower demand is also part of the explanation for today’s drop in oil prices. In the U.S., for example, demand for oil was already essentially flat or falling before OPEC decided not to curb production this fall. That’s thanks to stronger fuel efficiency standards for cars, trucks and SUVs, as well as to demographic and economic changes.
Historically, when the U.S. economy grows, so does its thirst for oil—but that linkage appears to be breaking down today.
So it’s not just that clean energy can compete in a world with lower oil prices. From a climate change perspective, a world of persistently low oil prices is exactly the world we want—so clean energy producers, and everyone else, need to be ready for it.
Michael Liebreich of Bloomberg New Energy Finance sums it up perfectly here: “The story should not be how falling oil prices will impact the shift to clean energy, it should be how the shift to clean energy is impacting the oil price.”
Canada’s Energy Opportunity
As I mentioned in my previous post, clean energy and oil don’t compete head-to-head very often in Canada today. But there’s an important exception to that rule: oil and clean power do compete for the attention of governments. And as we’ve pointed out, clean energy isn’t winning that particular battle in Ottawa right now.
Instead, when Canada’s federal government says “energy,” it usually means “oil and gas”—and clean power usually still sits at the kids’ table in our national energy banquet.
The plunge in oil prices offers a dramatic illustration of the downside of that approach. Just ask Alberta’s finance minister, whose goal of a balanced budget gets tougher every day—and who says his province has to “get to a position where we’re not listening to OPEC to decide on how many schools we’re going to build.”
More attention to Canada’s clean energy strengths, and more effective policies to support its growth, would give our country a more resilient energy sector from coast to coast to coast. That means support for clean power technologies, investment in clean energy infrastructure, and—yes—a price on carbon. (We’re not alone on that one: the International Energy Agency’s director, Maria van der Hoeven, makes a compelling case that now is the perfect time to adopt new carbon pricing policies. It looks like Ontario agrees.)
Economic modelling from the International Energy Agency’s flagship World Energy Outlook shows that clean energy has a bright future under any scenario. The Agency finds that clean power’s share of the energy mix will grow even under current policies; the sector truly takes off in a scenario that sees strong global action to tackle climate disruption.
Here in Canada, let’s hope that low oil prices give us the push we need to make our country’s clean energy success a priority.