The Paris COP21 Climate Agreement in December put the world in an exciting position, with 187 countries agreeing to make ‘intended nationally determined contributions (INDCs) to control the impact of CO2 on our environment. The fact that we reached such a consensus was amazing in itself, but now we need to act on this collective momentum, with many wondering who will lead this charge, and where the “big wins” will come from.
Those who follow these issues can now celebrate, as 2016 brought a large unexpected global gift – oil at $30/barrel, or even less. No one ever expected these low prices, with assumptions of “Peak Oil” constraining supply, and China and India’s growth driving demand, most assumed high revenues and continual investment attraction, while government subsidies kept the machine well-oiled.
A major factor in the price drop has been the disruptive innovation of fracking which now happens almost in Internet time, and virtually guarantees that oil prices will not rise for a long time coming (unless there are significant international political disruptions which could increase in likelihood with some oil countries losing their main revenue sources). Fracking is the ability to extract gas from shale in previously unreachable locations and quantities, and with relative ease. This means that the large incumbents and oil nations who have relied on high prices have had the rug pulled out from under their feet with a multitude of smaller players now competing with production and supply.
Environmental groups do not like the potential dangers and impact of fracking, but there is a big unintended silver lining for renewable energies. Now with low oil prices, even the new, smaller fracking players will not want to enter the market. So where will the money go? To clean energy, because there is no turning back technology, and fracking has now opened the flood gates, creating enough supply that the U.S. can now become an oil/gas exporter.
The old school of thought used to be that high oil prices made renewable energy more competitive, but this did not remove the need for clean energy to also compete against over $650bn in global subsidies to the oil industry. Now, contrary to popular belief, with oil at $30/barrel, and the reverse oil shock, we have the opportunity of a lifetime to shift investment into the much needed clean energy.
Big oil companies are hemorrhaging at the wells, laying-off large chunks of their staff, and countries are now much less inclined to keep those unnatural levels of pollution subsidies intact as they re-allocate spending on infrastructure and services which have long been needed. With low oil prices, the social pressure to keep prices artificially affordable is also greatly reduced.
Those listening will have heard the “starting gun” go off, marking the start of the big shift to the renewables that we have long been waiting for. Large oil industry players no longer have the resources or the guts to make big new investments in wells which are increasingly expensive, as the industry is down over $3 trillion since prices have fallen, with earnings of the energy sector of the S&P 500 down by 76 percent. Of the US syndicated loans for the oil and gas industry (US$256 billion), 15 percent are now regarded as distressed, according to a Wall Street Journal report.
That flood gate also comes in parallel with scaled advances in solar, wind and other clean technologies, bringing their prices down even further, while uptake and installations escalate. This is coupled with the rapid growth of electric vehicles and battery capacity with the likes of Tesla and Panasonic, the boom of mega-cities where autos will no longer thrive, and regional trade agreements within the Asia Pacific Economic Cooperation (APEC) that reduce the tariffs on clean-tech equipment to five percent or less between all member states, while they collectively aim to double renewable energy generation by 2020 and reduce energy intensity 45 percent by 2035.
Smart money will now begin to shift to the places it belongs, in smart, long-term investments for clean energy. Countries will now be even more supportive than before for renewable energy options as a consequence of the Paris COP21 Agreement and the INDCs, while the Sustainable Development Goals (SDGs) are being more widely addressed, having been revised by the United Nations in September. These new investments are “smart” because they also come with reduced liabilities in the form of carbon taxes or offset fees, pension fund divestment pressure, and poor brand reputation from the carbon-centric world of the past.
Long term investors and lenders now really have to make an educated guess about 30-year infrastructure bets on oil, and even coal, both which carry significant new uncertainties with them. Short term money, on the other hand, will steer clear for the immediate future, giving room for even more momentum for renewables to take hold. Investments in environmental goods and services, on the other hand, are expected to grow from US$500 billion today, to US$2 trillion within five years.
The perfect storm is here, but it has come in via the back door and has caught everyone by surprise, in fact, most have not seen it yet. The mindset continues to be that low oil prices will kill off new innovations. Not this time. It only takes a year or two in this day and age for innovations and scale to take root, and with all of the right factors now in place, this is the time for renewables to take off, like the snowball that has finally been pushed over the hill and is now picking up self-sustaining speed. We hope you are ready to come along for the ride. Even the World Economic Forum this month is talking about the 4th Industrial Revolution, and they have not even factored this one in yet.
(This article originally appeared on China Daily. It has been reprinted here with permission.)