Energy Crunch: unburnable oil

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The price of oil fell below $50/barrel this week, extending the recent rout and causing turmoil in financial markets, worsening economic crisis in Russia and Venezuela, and helping to push the Eurozone towards deflation. Most commentators have attributed the plummeting price to an increase in the global supply of oil, mainly caused by a surge in US shale oil production. But a fall in demand for oil has been just as important – this being the result of both good and bad news.

 

The bad news: oil demand is falling partly because Europe has failed to create a lasting recovery, and the Chinese economy is also slowing sharply. The good news is that oil demand is also falling because of dramatic improvements in energy efficiency – spurred by those same high energy prices – in some surprising places.

 

The US economy, for example, has grown by almost 9% since 2007, while demand for petrol and diesel has dropped by more than 10%, as motorists have traded in their gas guzzlers and driven fewer miles. According to Michael Liebreich of Bloomberg New Energy Finance, “The story should not be how falling oil prices will impact the shift to clean energy, it should be how the shift to clean energy is impacting the oil price.”

 

Mr Liebriech’s spectacles may have a rosy tint – it’s likely the oil price slump will reduce the economic imperative to cut consumption, something already evident in resurgent car sales at the end of last year, in particular of less fuel efficient cars. Regardless, the oil price slump seems unlikely to last.

 

Analysts have made clear that, at current levels, one third of global oil production is uneconomic. $1 trillion of planned investment is under threat and oil companies will need to slash spending by 40% this year, according to ratings agency Moody’s. As a result, the oil ‘glut’ should evaporate soon enough. Analysts at Keppler Cheuvreux forecast that US shale production will stall in the second half of the year, sending prices upwards again.

 

At home, and with a general election on the horizon, George Osborne seized a political opportunity to insist that oil companies must pass lower oil prices on to motorists. But for everyone else it should be clear that better investment opportunities are not with oil but in a truly sustainable energy future. It’s important to remember that not only are many oil projects now economic unviable, the majority of remaining fossil fuels are also incompatible with efforts to limit climate change to 2oC, as yet another academic study has confirmed this week.

 

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