Fossil Fuels and Renewables: A relationship with too many red flags
As a millennial in 2020 its hard to picture myself without my smartphone and laptop, both are absolutely critical to my life, and the same is undoubtedly true for millions of others around the world. Naturally, these super devices were created by and are powered by electricity, a resource that’s so abundant globally it’s easy to forget where it came from and the impact it has on the environment. To put our energy use into perspective, each day, we consume roughly 420 Terra-watt hours of power with an estimated impact of 123 million tonnes of CO2 in the atmosphere. That is roughly equivalent to charging your phone 15 trillion times or the removal of 160 million trees.
As more persons get access to smartphones, laptops, cars and two-day shipping the global energy demand is expected to grow by 50% by 2050. While this is great for opportunity and equality we must be cognisant that more than half of our energy comes from fossil fuels as seen in the chart below. While we can see that there has been much progress in the use of renewable energy in its various forms, its contribution isn’t anywhere close to what oil and natural gas are, averaging around 15%, expected to be around 28% by 2050. These figures paint a disappointing but cautiously optimistic view of our renewable future, but given the state of our environment, we must accelerate the energy transition and reduce our fossil fuel usage. The environmental numbers seem to be on our side, but what do the financials say?
Figure 1: Global Primary Energy Consumption 1965-2018
A series of unfortunate events
Survivors of the first quarter of 2020 (Jan-Mar) will have many stories to tell about the multiple potentially world-changing events that occurred, however, two particular stories stand out in the world of energy, the Coronavirus, and the Russia-Saudi oil price war. Where the coronavirus massively reduced the demand for oil, particularly in Asia as they shut down to deal with the threat, the Russia-Saudi oil price war greatly increased the global supply. Both of these events hit the oil market with a sucker punch and much of the global energy sector is in disarray witnessing some of the lowest prices the market has seen in 18 years.
Figure 2: WTI Oil prices from April 2019 to March 2020
Source: Markets Insider
The fallout of this will likely impact Oil and Gas exploration projects in the near future and limit the industry’s significance in the world by a fraction. As a self-proclaimed environmentalist, I am left to wonder if this is a win for the movement or are there underlying implications left by these dramatic turn of events.
All about the benjamins
In traditional economics, if the price of a good is lower, naturally, we demand or use more of it, this holds true for energy as well, a necessary commodity to power our homes, cars, and cities. This logic suggests that a low oil price is bad news for renewable energy of all forms. It means that electric vehicles and biofuel will be less competitive than their gasoline counterparts. Solar and wind projects may be discarded in favor of more natural gas production and fossil fuel producing economies will face a recession which likely impacts their ability to invest in energy transition initiatives and renewable subsidies. Due to the scale and importance of these projects on local economies, particularly in the developing world where capital is more difficult to come by any shift in price per output is critical in the decision-making process
Figure 3: Cost per kWh of renewable energy forms versus natural gas
Now that the impact of oil prices on renewables investment is established I must state that it is likely that the impacts of coronavirus and the oil price war will not last beyond the short term. However, it is also just as likely to fall even further as Saudi Arabia has indicated its intentions to increase the production of oil even more and become the world’s largest producer with the lowest operating cost, well below the current reported figure .
Defying conventional thought for a brighter future
Considering the stability of oil prices as a success factor to the renewable industry is not an easy concept to grasp to those that are focused on environmental protection. However, we must continue to innovate and find solutions to the challenges that prevent the clean energy transition necessary to sustain our environment. In recent years, the shift towards responsible investment has been one of the most noticeable market trends and more research into quantifying the value of natural assets will help to defy traditional financial evaluation methods. At the same time, renewable energy has become increasingly competitive, and countries that are sensitive to the impacts of climate change who are also vulnerable to oil price shocks have begun to see the value of a stable and clean form of energy.
Research from the IDB suggests that “Investments in renewable energy would generate US$5.7 billion in net economic benefits to CARICOM (Caribbean) Countries. In addition, these countries could reduce fuel oil imports by 260 million barrels and reduce CO2 emissions by 26 percent (41 million tonnes) between 2020 and 2040. The devastation caused by hurricanes in recent years, and global climate trends, have increased the urgency in CARICOM countries to invest in energy resilience. Investing in resilience in CARICOM now could result in net economic benefits worth US$4.3 billion over the next 20 years.”
In summary, regardless of your perspective on the economics of oil prices what matters is what we value and the willingness to change conventional thought for a brighter future for all of us.
Co-Founder of REgenTT
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