With regulation driving investment, low prices need not jeopardise progress on green energy and retrofit
Who would have guessed that 2015 would start with a return to oil prices last seen in – well actually not long ago – 2009, in the midst of the post Lehman banking crisis? As ever, forecasting where prices go next is a fool’s game and invariably ends up with the wrong answer.
Perhaps this is reflected by the range of views in the press, with BP suggesting a prolonged two to three year period of low prices while others suggesting that prices will begin to rise by the end of the year. Either way, enjoy it whilst it lasts and prepare for business as usual when prices turn as they surely will.
So is this good news for the UK, the environment and green technology? Economists tell us that it is good for economic demand in the UK and will stimulate growth as consumers and businesses spend or invest the money that would have otherwise gone to the oil companies.
The flip side of this is that a reduced energy cost lessens the financial case for investing in energy efficiency and green technology - and spare a thought for the many skilled employees working in the oil industry in the UK who will find themselves without a job. However, particularly in the UK and Europe, energy efficiency is mandated through regulation or other policy instruments, so environmental and efficiency improvements will continue largely unaffected. Assuming that prices will inevitably rise, long term investment in new greener technology should also remain unaffected.
If prices remain low for an extend period there will be added pressure on the renewable energy industry to reduce costs still further
While oil is important in transport and as a feedstock into the chemicals industry, natural gas is more important to UK electricity generation and the built environment. The price of natural gas follows that of oil and we have seen wholesale gas prices tumble this year. We are still waiting for this to be reflected in the retail price, and we may be a little disappointed when the reductions feed through; however, there will be other hidden benefits that happen sooner.
The lower gas price may be enough to improve the economics of gas relative to coal, enabling the generators to switch from burning coal to gas, helping to reduce the 34% of UK electricity currently generated from high carbon coal. If prices remain low for an extend period there will be added pressure on the renewable energy industry to reduce costs still further to limit the apparent disparity in relative costs of production.
There has been a lot written about why the oil price has fallen so rapidly and so far. There seem to be more conspiracy theories than a Dan Brown novel. However, since commodity prices are subject to the laws of supply and demand I am going to accept the argument that while supply has remained constant demand has fallen despite global economic growth.
This implies that the direct link between economic growth and oil (not energy) has weakened due to improving energy efficiency and the expansion of low carbon & renewable technology. The International Energy Agency reported last year that 22% of global electricity was now produced by renewable energy sources, up from around 12% a decade ago. Clearly there is a long way to go, but it is nice every now and again to recognise and acknowledge progress.
Nick Cullen is a partner at Hoare Lea