The oil crash and climate: What to know

Source: By Carlos Anchondo, E&E News reporter • Posted: Thursday, March 12, 2020

The U.S. Energy Information Administration reported yesterday that oil would experience its first year-on-year decline in production since 2016, raising new questions about how the recent price crash might affect greenhouse gas emissions.

Lower oil prices will reduce U.S. drilling activity late this year, EIA said in its monthly outlook. U.S. oil production will average 13 million barrels per day this year before falling to 12.7 million barrels per day in 2021 — the first time back-to-back declines have happened in four years.

For climate watchers, the oil dynamic is stirring a debate about how low prices and reduced production intersect with greenhouse gas emissions. In the past, oil plunges helped raise some emissions by shifting drivers into more-polluting cars and making renewable investments less attractive. At the same time, the oil crash could dampen economic activity that contributes to emissions. The price drop’s overall climate impact is complicated by the outbreak of the new coronavirus, which continues its spread worldwide, is reducing travel and has its own sizable emissions impact.

Lorne Stockman, a senior research analyst at Oil Change International, said what happens to emissions is complicated and affected by what production looks like in the long term.

“The crash in oil prices is very detrimental to a transition to clean energy,” Stockman said, adding that a lot depends on how long it takes the Saudis, the Russians and OPEC to reach an agreement. “How long the price stays low for is a big question here.”

Low oil prices will remain a problem unless governments step in and raise prices through something like a carbon tax or implement major structural changes from plans like the Green New Deal, Stockman said. Otherwise, the cheaper that oil and gas remain, the harder it will be to wean society off those fuels, he said.

There is some possibility, however, that emissions could decline because of the consolidation of independent oil and gas companies heavily affected by low prices, said David Goldwyn, chairman of the Atlantic Council’s Energy Advisory Group.

“The reality is that independents that are more thinly capitalized have been the strongest source of political resistance to methane regulation at the state level and the federal level,” Goldwyn said on a call with reporters yesterday about oil markets and the new coronavirus, which causes COVID-19.

“I think you’re more likely to see more responsible oil field practices and reduced emissions and more monitoring, detection and mitigation from the larger, better capitalized companies than you’re seeing from the independents.”

In that respect, Goldwyn said, consolidation in the United States of some of the independents — as a result of the oil price drop — could lead to more emissions reductions from the oil and gas majors.

Jean-François Seznec, a senior fellow at the Atlantic Council’s Global Energy Center, said on the same press call, though, that a price war would hurt the ability of Persian Gulf countries to limit their emissions.

“This whole situation will hurt because the amount of capital … needed to limit these emissions is huge, and if they go in a price war, it’s going to really stop them from implementing those emissions policies that they have on hand,” Seznec said.

Sarah Ladislaw, a senior vice president at the Center for Strategic and International Studies, said it is difficult to separate impacts from low oil prices from the economic downturn caused by the novel coronavirus. Emissions are down in the near term due to less economic activity, with not as much flying and driving, and less demand for certain kinds of products. People usually consume more oil when prices are low, but that’s not necessarily true in the context of the novel coronavirus, she said.

Normally, oil price wars prompt a lowering of prices that in turn induces an uptick in demand, but there is not going to be an uptick if the coronavirus stops people from doing economic activities, according to Ladislaw.

“I don’t think that it’s the oil prices being low that will slow things down in terms of clean energy deployment and the transition,” Ladislaw said, who added that she’s interested to see if future fiscal stimulus in the United States goes to oil and gas production or potentially to clean energy resources.

The oil industry is concerned not only about prices but also about investor confidence in the sector, Ladislaw said.

As for carbon capture, Brad Crabtree, director of the Carbon Capture Coalition, said the oil and gas industry has been through volatile periods before and that he does not expect companies to forgo carbon capture, utilization and storage (CCUS) projects because of the current market.

There could be some postponement of projects, however, which he said shortens an already tight window for companies to start construction under Section 45Q of the tax code, which incentivizes CCUS projects.

“There is a tendency, an understandable tendency, in times like this for companies to focus on the most urgent aspects of their bottom line, both in terms of time and attention, but also in terms of allocating scarce resources,” Crabtree said.

Crabtree said the oil and gas industry has made changes to its business model to address climate change through measures like CCUS, something he doesn’t see going away as a priority even if projects are delayed in the near term.