Ideas & Debate

Climate change mitigation efforts face growing threat from falling oil prices

GREEN

Greenpeace volunteers do a mock simulation of an oil spill in Santa Cruz last year to protest exploration plans for oil and gas off the coast of the Canary and Baleares islands. PHOTO | AFP

A key measure of climate change mitigation is how much oil we burn as it reflects production of carbon dioxide, which damages the ozone layer that protects us from impacts of global warming.

In 2004/05, three indirectly related occurrences happened. The Kyoto Protocol on global warming was taking effect, the Chinese economy was overheating with hyper growth and oil prices had commenced their rapid rise.

The Kyoto Protocol called for reduced use of oil to curb carbon emissions. The booming Chinese economy consumed more oil and increased emissions while pushing up prices as supplies were stretched.

The high oil prices in turn prompted consumers across the world to seek measures to reduce oil consumption, thus supporting the Kyoto Protocol objectives.

This is also when high Chinese-driven oil demand growth and the limited global crude production capacity prompted energy academics to predict “peak oil” at around 2030. That is the date they predicted the world oil demand would exceed available exploitable global oil reserves. Peak oil would trigger a countdown towards diminished global oil resources, which at the time were emphasised as “finite”.

Oil economists, on the other hand, used their models to extrapolate oil prices to over $200 per barrel by around 2020 driven chiefly by a mismatch between demand and supply.

Consequently, a scenario of reduced future oil supply and high prices was globally institutionalised.

This prompted proactive actions by governments, energy economists, conservationists, environmentalists and investors. These reactions were mainly driven by need for energy security and for energy business sustainability.

Research and innovations went into high gear to promote new non-oil renewable energy. Investors saw a good business case and provided massive capital to develop renewable energy.

The Kyoto Protocol adherents supported renewable energy while environmental authorities across the world provided legal and regulatory support for renewable energy investments.

This is when wind, solar, geothermal, and bio-fuels moved from micro to macro projects thus creating huge commercial energy sub-sectors. New technologies were also developed to sanitise the hitherto condemned nuclear and coal energy sub-sectors.

Also, the energy cost and green agendas supported oil conservation and efficiency programmes and projects. New low carbon technologies (vehicle and equipment) were developed to conserve oil while reducing emissions and costs.

Economic justification for renewable and green projects was mostly based on comparative alternative high cost of oil, earnings from carbon credits and, of course, “moral” obligation for the green agenda.

On the other hand, the high oil prices had the exact opposite motivation for oil investors who saw a golden opportunity to increase supplies to maximise returns from the prevailing high prices.

Oil companies raised new capital to fund research and new technologies for oil production in hitherto marginal and difficult frontiers.

The oil investors ventured into deep oceans, went to Siberia, developed appetite for arctic zones and also scrambled for new African frontiers.

They developed new technologies for unconventional shale and sand oils. They also created technologies to monetise and globalise distant natural gas distribution. Natural gas had by now acquired high respectability as a clean and low carbon fuel.

Multinational oil firms mostly withdrew from the downstream and midstream oil sectors to concentrate their resources in the higher margin upstream sector. All this time, the one key business assumption by the investors was that high oil prices were sustainable into the future.

As companies continued to produce more oil, the renewable energy investments and conservation, coupled with weakened global economic performance were simultaneously reducing oil demands. Finally there developed an oil supply glut and prices nose-dived.

It is the high oil prices that mostly supported climate change mitigation. But reduced oil prices, weakened carbon credit markets and lackluster global green campaigns will all conspire to make “green” projects and programmes increasingly more difficult to justify economically.

Conservation and energy efficiency efforts will experience diminished vigour as consumers increase appetite for cheaper oil. I understand that Americans are already talking of reverting to high speed and high power vehicles, now that fuel economy is no longer an over-riding consideration at reduced prices.

In Kenya, more kilometers will be driven and more carbon dioxide spewed into the atmosphere as retail prices plummet.

Global oil prices are coming down at a time when the global warming agenda is apparently less globalised than was the case 10 years ago. Political commitment for sustained efforts by nations to reduce carbon emissions is visibly low.

The relationship between climate change mitigation efforts and reduced oil prices is real and shall remain negative unless a unified global approach to climate change is effectively re-enacted to levels reminiscent of ten years ago.

Mr Wachira is the director, Petroleum focus consultants. Email: [email protected]