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Low oil prices and the new climate economy: constraint or opportunity

This year's SITE Energy Day was devoted to discussing the consequences of oil price fluctuations for markets and actors of the economy. The half-day conference engaged policy-oriented scholars and experts from the business community to discuss the impact of oil price fluctuations on macro fundamentals, international trade, strategies of oil cartels, strategic risk management, and opportunities for change in energy systems. Luca De Lorenzo, Senior Researcher at Stockholm Environment Institute, gave a presentation "Low oil prices and the new climate economy: constraint or opportunity?" For more information and research analysis please visit: www.hhs.se/site

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LOW OIL PRICES and THE NEW CLIMATE ECONOMY
Opportunity or constraint?
Luca De Lorenzo
Stockholm Environment Institute
Context: Our energy system is built on fossil fuels
2
Where do lower oil prices leave us in a transition to a low carbon economy?
• Fossil fuels provide ~86% of global energy
• Stable carbon intensity over the last 3 decades
Firstly cheaper oil helps the global economy
Although with uneven effects between consumer and producer countries
3
0,0
0,2
0,4
0,6
0,8
1,0
2016
0,8%
2015
0,7%
Global GDP
points increaseThe world uses approx. 90 million bbl per day...
...so an oil price of $50, rather than $100 per bbl...
...would save consumers $1,6 trillion
0,3%
0,2%
However, there are still many drivers that justify a move beyond fossil fuels...
Volatility hurts the economy
4
1
• Increase decision uncertainty
• Delay business investment
• Costly reallocation of resources
Cost of oil as % of GDP
Reducing exposure to energy price
volatility has economic value
7,6%
0,8%
Source: BP Statistical Review
We should not bank on low oil prices
5
2
• Predictions have hystorically proven
wrong
• OPEC could change sentiment
• Global economic activity could pick
up again
• CAPEX spending slashed by majors
• Varied outlooks already out there
We should not deny fossil fuel subsidies
6
3
Source: Koplow, 2014
Accoding to the International Energy
Agency, fossil fuel subsidies:
 Reached $550 billion value, 2013
 Impose a heavy burden on state
budgets
 By 2020, can represent 0,7% of
global GDP
 Extremely inefficient way to
support the worse off

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Low oil prices and the new climate economy: constraint or opportunity

  • 1. LOW OIL PRICES and THE NEW CLIMATE ECONOMY Opportunity or constraint? Luca De Lorenzo Stockholm Environment Institute
  • 2. Context: Our energy system is built on fossil fuels 2 Where do lower oil prices leave us in a transition to a low carbon economy? • Fossil fuels provide ~86% of global energy • Stable carbon intensity over the last 3 decades
  • 3. Firstly cheaper oil helps the global economy Although with uneven effects between consumer and producer countries 3 0,0 0,2 0,4 0,6 0,8 1,0 2016 0,8% 2015 0,7% Global GDP points increaseThe world uses approx. 90 million bbl per day... ...so an oil price of $50, rather than $100 per bbl... ...would save consumers $1,6 trillion 0,3% 0,2% However, there are still many drivers that justify a move beyond fossil fuels...
  • 4. Volatility hurts the economy 4 1 • Increase decision uncertainty • Delay business investment • Costly reallocation of resources Cost of oil as % of GDP Reducing exposure to energy price volatility has economic value 7,6% 0,8% Source: BP Statistical Review
  • 5. We should not bank on low oil prices 5 2 • Predictions have hystorically proven wrong • OPEC could change sentiment • Global economic activity could pick up again • CAPEX spending slashed by majors • Varied outlooks already out there
  • 6. We should not deny fossil fuel subsidies 6 3 Source: Koplow, 2014 Accoding to the International Energy Agency, fossil fuel subsidies:  Reached $550 billion value, 2013  Impose a heavy burden on state budgets  By 2020, can represent 0,7% of global GDP  Extremely inefficient way to support the worse off
  • 7. Recognise that renewable costs are decreasing fast 7 4 0 100 200 300 400 500 600 700 800 2020 20352030 2015 H1 x2.7 x3.6 x2.6 2012 0 1,000 2,000 3,000 4,000 5,000 6,000 203520302020 -32% -53% 2015 H11 -56% 2012 2009F 2014F 2014F 2009F Global forecast of CAPEX for utility scale solar PV installations, USD/kW Global forecast of cumulative installed solar power capacity, GW “The greatest shortcoming of the human race is our inability to understand the exponential function.” Albert A. Bartlett
  • 8. Co-benefits have high value and are not priced in Particularly relevant in the oil dominated transport sector 8 5 How air pollution has economic costs Each year of life cut short in turn reduces the GDP of that country. Productivity is further reduced by lost work days due to sickness Chronic lung and heart diseases are caused by PM2.5 inhalation, these in turn cost countries millions in health care Wheat crops in India were 36% lower in 2010, of which 90% is attributable to air pollution Cost of paying for damages associated with extreme weather events has risen by 60% over the past 30 years in Europe Extreme weather damage Agricultural yield loss Health-care costs Labour costs 3.7%UK Germany USA 4.5% India 6.0% 1.5% 5.8%China Estimated costs (% GDP) Source: WHO 2014 , New Climate Economy, 2014, OECD, 2007
  • 9. We should reflect on signals from long-term investors 9 6 • Reallocation of capital, both within companies and at market level • Potential for fossil fuel assets to become ”stranded” • Institutional investors becoming more active shareholders • Long term players (pension funds, insurances, central banks) increasingly considering climate risks “The exposure of UK investors, including insurance companies, to climate shifts is potentially huge” Mark Carney, Governor Bank of England In order to fulfil long-term liabilities, insurers like Allianz need stable investments and long-term yields – and this is exactly what wind and solar farms have to offer” David Jones, Head of Renewables at Allianz
  • 10. So are low oil prices an opportunity to correct course? 10 Fuel price volatility Renewables getting cheaper Fossil fuel subsidies Investors concerns Co-benefits drivers
  • 11. Take advantage of low price to reform energy markets 11 Remove fossil fuel subsidies Introduce a price on carbon • As many as 27 countries are now undertaking reforms • 40 countries + over 20 jurisdictions have carbon pricing • Another 26 countries/jurisdictions considering
  • 12. Play it safe and take a long-term view despite low price 12 Keep the investment momentum in renewable energy Source: McCrone et al., 2015 Global renewable energy investment (US$billion) • $270 billion in 2014 • 35% more capacity than 2011 • Cross over, more RE capacity addition than fossil fuel in 2013
  • 13. Realize that a low carbon transition can help reduce pressure on fossil prices in the future 13 • There are plenty of reserves already, oil, gas and coal – not all might be developed (stranded assets) • Current lower prices are scaling back investments in further developments and exploration • Opportunity to recalibrate investment strategies and maintain steps to a low-carbon economy • Lower future demand vs. BAU – outlook for lower prices (IEA models as much as 35% lower in a 2C scenario) • Abundance of fossil fuels, questioning development of high-cost oil resources
  • 14. Concluding remarks • Oil (and fossil fuels) still dominate the energy mix and lower prices are a welcome help to the global economy • However, we should not allow this to derail our transition towards a better, more sustainable energy system as the long term economic benefits of structural changes to economies and energy systems remain valid • In fact we should see this as an opportunity to reform our energy markets – True costs of fossil fuels and reduce their subsidies – Introduce a price for carbon – Target some of the long lasting co-benefits 14