The price drop that’s really worrying big oil
The Age, 24 December 2015
So oil prices crawled off their 11-year low overnight – big whoop. Such gyrations are merely part of the present tussle between supply and demand. There’s a more serious problem hanging over the oil price that won’t be solved by capping a few wells. Passing remarks in a social setting made to me by a former oil industry CEO and current chairman provided some insight into the growing despair about price: uncertainty about how much of the current plunge is merely the cycle, or something structural. In either event, he thought it was only a matter of time before oil went the way coal is going.
Extrapolating his thinking, what worries hydrocarbon producers isn’t just the surge in production meeting lack-lustre demand thanks to slower global economic growth – it’s the way renewables are becoming cheaper as the technology rapidly improves, chasing oil, gas and coal prices down.
It becomes harder to believe coal and oil prices will bounce much out of this cyclical low simply because the falling price of renewables will effectively cap the upside.
Eventually mines that lose money will be closed and oil companies will stop drilling wells that can’t pay for themselves and there are billions of people who will consume more energy as they attain the improved standard of living they seek. However, the resulting reduction of supply and increase in demand will butt up against the promise of more and cheaper renewables.
At the same time, the established fuel industries will keep renewables the more expensive overall option for a long time yet, even while renewables improve their efficiency.
Carbon and renewables are locked in competitive downward spiral. Whatever improvements are made by renewables, coal and oil will be priced more cheaply until some distant point.
Running at a loss
Why and how coal (and oil) is and will be produced at a loss has been neatly explained by the Australia Institute’s Richard Denniss:
“Imagine you owned an ice cream van parked by the beach and your refrigerator broke. No matter what you paid for the ice cream, you should sell it for anything you can before it melts. Some money is better than no money.
“Now imagine that you owned billions of tonnes of coal and you thought that in 20 years time new technology or new global restrictions meant you might not be able to sell it. We have heard for decades how Australia had ‘hundreds of years’ worth of coal, but now we are trying to sell it in a few decades. The green paradox says that talk of future emission reductions can cause an increase in current coal production. Indeed, global coal production has risen 50 percent since the world first agreed to reduce emissions in 1992.”
Dumping coal (and oil) on the market keeps renewables expensive, but it also provides the incentive to make renewables cheaper. There are very good arguments for governments to invest more in renewables research than just subsidising the existing quality of solar and wind projects.
That green paradox further confuses Australia’s quixotic attempt to avoid pricing carbon. A recent The Economist article by Toulouse School of Economics authors makes the point that subsidising renewables can be counterproductive without also pricing carbon.
For the oil industry, the immediate worry is the rapid rise of electric cars. They’re still expensive with a tiny market share, but the fear is that they are evolving very quickly as car manufacturers race to develop them.
The irony is that the main source of power for your fancy Tesla right now is coal. And that’s not changing any time soon.
“Coal burner” doesn’t have quite the same ring to it as “electric car’.