most from plunging oil prices?
The Winners and Losers of Cheap Oil
With the price of oil settling in at around $50 a barrel, down roughly half since last summer, it's time to ask what the drop means for sustainability. It may seem like an easy question. After all, with oil so cheap, it's harder to make the business case for renewable energy. But the situation is not as simple as that.
There's no question that that cheap oil creates winners and losers. Airlines win big, since jet fuel is a big part of their operating cost. Fertilizer manufacturers and other chemical companies win big, since they use oceans of oil to make their products. The oil companies themselves lead the list of losers, along with companies that make drilling equipment and provide services to the oil industry.
At the same time, cheap oil lets some nations win big, while others suffer badly. Most of the oil exporting countries can't sustain their government spending with oil at $50 per barrel, so we can expect some sharp belt-tightening and even dangerous political instability. For example, Russia needs a price of about $105 per barrel – roughly twice the current level – to keep its economy on track. At the same time, cheap oil helps the economies of countries like Japan, which need a lot of energy and have little or no domestic supply of their own. If oil stays cheap, then some of the countries that the U.S. has battled to contain (like Russia and Iran) become less of a threat. Then we can spend less on defense and more on things that improve the quality of our lives.
The impact of oil on environmental sustainability is not so clear cut. With oil cheap, it's harder for renewable sources like wind and solar to prove their cost-effectiveness. But on the plus side, cheap oil means a lot of expensive and marginal oil production will get shut down or never developed in the first place. First and foremost, cheap oil makes the Canadian tar sands moot. Tar sands oil is not economically feasible unless the price of oil is above $100 or so per barrel if the oil has to be shipped by rail, and might work out at $75 per barrel if a pipeline were built. But at $50 a barrel, it's dead on arrival. Similarly, environmentally-risky deepwater exploration and development doesn't pencil out at $50 per barrel.
Cheap oil will slow the growth of fracking (hydraulic fracturing), one of the more problematic sources of energy. Many environmentalists are sharply critical of fracking; it is poorly regulated, and some fracking sites leak methane, a powerful planet-warming gas. Also, fracking operations inject contaminated water into the ground where it mixes with and pollutes the local drinking water. But today's low oil prices will likely slow the growth of fracked oil, because many fracking operations are just not economical at oil prices below $75 per barrel.
In addition to taking some of the dirtiest fuels off the market, today's low crude prices promote sustainability in other ways. Low prices today set the stage for price volatility in the future by putting a tourniquet on investment in oil production. Industry output will fall, slowly at first and then more quickly as older, failing facilities are not replaced. We will reach the point when a small hiccup in the supply, particularly if it happens when the economy is on an upswing, can send the price soaring again. That hiccup will inevitably come when the recession ends in Europe and elsewhere. Then energy demand will rise, and with production capacity diminished, prices will spike. This price shock will spur more companies to pursue options that reduce their exposure to price volatility. And that means turning once again to fuels that are free.
David Brodwin is a cofounder and board member of American Sustainable Business Council. Follow him on Twitter at @davidbrodwin . Petroleumworld does not necessarily share these views.
Editor's Note: This commentary was originally published by US News and World Report /economic-intelligence, March 9, 2015. Petroleumworld reprint this article in the interest of our readers.
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