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OIL AND GASUK POLICY
13 January 2015 9:40

Expert views: How low oil prices affect the UK’s climate and energy policy

Mat Hope

Mat Hope

01.13.15
Oil pumps in deserted district
© ssuaphotos/Shutterstock
Mat Hope

Mat Hope

13.01.2015 | 9:40am
Oil and gasUK policyExpert views: How low oil prices affect the UK’s climate and energy policy

The oil price has dropped to $45 per barrel, its lowest point for six years. Some commentators are concerned the price drop could scare off investment in low carbon energy. Others say long-term policy goals should ensure the UK continues to curb energy sector emissions.

Carbon Brief asked a range of experts what the low oil price that could mean for the UK’s efforts to decarbonise the energy sector.  In particular, Carbon Brief asked them to address three issues:

Here’s what they had to say.

Justin Dargin, energy and middle east scholar, Oxford Institute for Energy Studies, University of Oxford:

“Oil prices will have a definite impact on natural gas prices because gas prices generally are linked to oil prices, therefore when oil prices decrease or increase, gas export contracts typically follow suit.”

“The falling oil prices do, to a certain extent, make an increase in oil consumption more likely. However, the political will in the U.K. and across Europe to reduce emissions is a long range strategic policy, and therefore, is somewhat insulated from the fluctuations in the international oil price.

“At the same time, renewable energy investment is likely to decline, so the government could develop some incentives to promote more research and development in renewable energy, as well as its use in power generation and other sectors.”

“There does not have to be a radical rethink of British energy policy. The extremely low price environment that we are in the moment is unlikely to extend into the long term. But, if it does, then the British government would be able to take advantage of the low oil linked natural gas prices and import more natural gas for use in the transportation and power generation sectors.”

Richard Nourse, managing partner, Greencoat Capital:

“Recent events have rather put paid to the theory notably espoused by one former Secretary of State that an inevitable rise in fossil fuel prices justifies renewables investment.  Given that all market participants know that volatility in the commodity sector is significant, this was always a weak justification for low carbon investment.

“It should always have been obvious that other justifications for low carbon investment need more emphasis in the political debate. In particular, that the costs of doing something are much less than the costs of doing nothing. The non-financial consequences of doing nothing are extreme in terms of conflict, migration, adverse weather etc.

“The falling oil price also goes quite a long way to buttress the thought that we need a diverse low carbon energy mix with lots of renewables but also CCS and nuclear. Low priced gas plus expensive CCS might be cheaper for periods of time than nuclear or renewables.”

“Most important of all, the falling oil price should not be seen as a justification not to continue to decarbonise. The carbon dioxide is just as harmful, even if it is “cheaper” to emit.”

Matt Brown, director, Pöyry:

“Falling oil prices will lead to lower gas prices. Much of our imported gas is priced linked to oil but with a six to nine month lag in the contract and averaging too. So it depends how long the oil prices stays down for. Also indigenous production is in part linked to oil prices either as the gas is associated with an oil field or longer term due to investment in [exploration and production].

“In the short term we may see fuel switching from coal to gas in power generation. But coal prices may also fall of course due to substitution between fuels especially in the power sector, here also the price of carbon comes into play.

“Longer term, the amount of money to be spent on ‘clean’ energy is constrained by the levy control framework. The government when setting out plans expected a high-ish gas price. If gas prices are lower, then the amount of ‘clean’ energy that can be funded will be lower.”

Peter Kiernan, lead analyst on energy, Economist Intelligence Unit:

“If sustained lower prices leads to growth in oil demand there will be some uptick in emissions, as the transport sector is one source of carbon dioxide emissions, although it may not be that significant. There is a lot of speculation on the impact of cheaper oil on renewables, although the direct competitors for renewables are coal and gas in the power sector, not oil. Both coal and gas prices have been falling, so renewables are already competing with cheaper fossil fuels.

“The cost involved in developing renewable energy is falling too, so it is not as if all other things remain constant while oil prices fall. The EU has set renewables and emissions targets for 2030 so you’d expect these to be adhered to, although with renewables they are non binding targets. A proper price on carbon would have an impact on emissions, but the performance of the ETS has been lacklustre in establishing a proper price for that.

Oil prices are likely to struggle throughout the first half of this year, but if there is a return to some strength in demand, a cut in production from OPEC, or a slowdown in US shale output then prices could experience some recovery. As a net importer of oil (and gas), cheaper energy prices have a net positive impact on the UK economy, although the North Sea industry oil and gas operators will obviously suffer with lower prices and cut back on capital spending.”

Kornelis Blok, Scientific Director, Ecofys:

“Of course it will have some impact, but it is quite limited because the price is not the only driver for decarbonisation.”

“For instance in the electricity sector where the growth of renewables has been strongest, the role of oil is negligible, at least in most developed countries. Of course, natural gas will follow the downward trend in the oil prices to some extent and gas is an important fuel, so there will be some impact. But also you see there is a lot of regulation on top of the price. There are either renewable energy obligations of feed in tariffs or whatever mean to stimulate renewables and these will stay in place.”

“There are three elements. The oil price will not stay low forever. In two or three years from now maybe even earlier [it will rebound]. The second is that oil is not important in all sectors. And the third is there is a lot of additional government policy that stays in place even in the case of low oil prices.”

Stephen Devlin and other analysts, New Economics Foundation:

“Since oil and gas actually have very distinct uses and our infrastructure is effectively fixed in the short term, [the low oil price might not have] much of an immediate impact on gas prices. So it’s not that likely to affect electricity generation. But it does make oil-fuel-based energy technologies much more economic, which would affect our emissions in the short term.”

“In theory, the 80 per cent by 2050 [Climate Change Act] target is fixed and needs to be achieved, but the trajectory up to that point is important as well, since it’s the accumulation of emissions that matters. So short-run emissions increases ought to be mitigated – UK plans aren’t insulated against these. But also, it’s not necessarily a question of whether further action becomes necessary, but whether it becomes more strategic or feasible – lots of people have suggested that this is the perfect time to crank up the costs of fossil fuels through public policy.

“The lesson from this is not about the price being at a low now but about how unpredictable and volatile oil prices are … if we’re interested in making our economy more resilient it should be another wake-up call to diversify our energy supply and push innovation in substitutes to oil.”

Nick Molho, chief executive, Aldersgate Group:

“If the government is to review its energy policy on the basis that the oil price is low, and make some long term decisions on that basis, they’d be banking that the price will stay at that level for a long time, which from past experience would be a very dangerous thing to do when you consider the number of highs and lows that we’ve seen, and the very sudden shift in the price that we’ve seen, following different geopolitical events over the years.”

“I think there’s an interesting dynamic here in the sense that the lower the price of oil, the more relatively expensive North Sea oil and gas extraction becomes, especially oil extraction, because you’re looking at more complicated forms of deep-sea drilling. So if you decide to have a policy that says well i’m going to make the most of the oil price, and just slow down my low carbon transition, then your cheapest oil will come from foreign sources and you’re going to make your economy and shipping very much dependent on imports.”

“That may make short term economic sense from a balance sheet perspective but from an energy security perspective you’re once again increasing your reliance on the stability of the country where you are getting the resource from.”

Richard Howard, head of environment and energy, Policy Exchange:

“The falling oil price is not good for efforts to decarbonise. It makes it harder to convince bill-payers and taxpayers that they should ditch cheaper fossil fuels in favour of more expensive low carbon options.

“The UK’s Contract for Difference system is particularly vulnerable to this change, since the reduction in fossil fuel prices will increase the effective subsidy to each unit of electricity generated (note that this is not the case under the previous Renewables Obligation scheme). DECC already downgraded its price forecasts, but since they only update them once a year they are already looking well out of date.

“If anything, the dive in oil prices underlines the risk associated with basing energy policy on a fixed view of future prices. Until Autumn 2014 the conventional wisdom was that prices were going to go ever upwards, and therefore nuclear power stations at £92.50 per megawatt hour and offshore wind at £150 per megawatt hour would one day start to look cheap. Nobody could have predicted this, and that is precisely the point.”

Will Straw, associate director for climate change, energy and transport, IPPR:

“The drop in oil prices has more to do with falling demand than it does from increased supply. Oil use around the world is no longer linked to growth as it once was. This is partly due to the rapid roll out of low carbon technologies and efficiency measures everywhere. Seen this way, the falling oil price is not a threat to efforts to cut greenhouse gas emissions but a product of them.

“Falling oil prices do, of course, provide some welcome relief to consumers and could mean that demand for oil increases. But rather than reaching for new policy tools, we must simply ensure that existing measures do what they are meant to.

“The EU’s emissions trading scheme (ETS) has become a laughing stock and the EU carbon price is barely â?¬5. Now is an opportune time to bring forward reforms to the ETS that put a proper price on carbon pollution. Meanwhile, countries without carbon prices must heed the advice of former US Treasury Secretary, Larry Summers, and bring forward measures as soon as possible. If this took place, it would make the price of oil irrelevant to solving the climate challenge.”

Alasdair Cameron, renewable energy campaigner, Friends of the Earth:

“If the oil price pulls down natural gas prices and holds them down for a long time that could obviously start to have an impact on renewable energy.”

“Some people might try and make out that that therefore undermines the rationale for renewable energy. I think that’s probably a bit of a stretch because it’s always been a two-pronged rationale it’s been that we need it for environmental reasons and it’s getting cheaper.”

“We already know that climate change is a massive market failure so the fact that the cost of gas is falling, the fact that the cost of oil is falling that doesn’t change that logic. In fact, it underlines the fact that this is a market failure. The real cost of these fuels aren’t being accounted for. So again this is why we need decarbonisation targets and it’s why we need to have a price on carbon.”

Charlie Kronick, senior climate advisor, Greenpeace:

“The UK’s carbon reduction targets are enshrined in law (the Climate Change Act) but the government, mostly in the guise of the chancellor and the treasury, have been trying to row back on that since day one in office by pushing gas, in the power sector, even before the price crash.

The carbon reduction targets have always been politically driven because demand is relatively inelastic relative to price.  People still need to get around, drive, and heat their homes – in that situation, policy will drive the changes and price will increase the changes at the margins.”

“We’re now a net oil importer, so it could improve (marginally) the position for the consumer, but the bulk of the pump price is tax, so that’s not the only market issue.  More likely it will impact UK economic policy – as Shell and BP are so important to the UK equity markets and their margins will be hit by a sustained low price. That’s one reason why the chancellor is calling  on airlines to pass on the savings to customers, because he can’t.”

Main image: Oil pumps in deserted district.

Note: The quotes have been edited for length, and come from a combination of email correspondence and telephone interviews. If you would like to contribute, please email mat.hope@carbonbrief.org.

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