OPEC announced recently that it would not cut its oil production, which accelerated an enormous drop in oil prices. While lower gas prices at the pump and a boost to the economy are generally welcome, we shouldn’t celebrate this time. If this (likely) short-term fall in prices slows down investment in cleaner forms of energy, we’ll all pay in the long run.
First, a breakdown of what the falling price of oil means for different people and sectors. Admittedly, there are some benefits. As I already mentioned, consumers should see a bit more money in their pockets. But let’s not forget that lower gas prices create less of a windfall now that our cars get much better mileage than they used to. And in the larger economic picture, all companies that aren’t in the oil business should see some of their costs drop, from oil and its derivatives directly (so chemical companies are happy), to transportation costs for companies with or reliant on big fleets (congrats FedEx and UPS).
It would seem that energy costs would drop as well, but there’s one important energy reality that many people forget: in the U.S., oil is a tiny part of our electricity system. So companies that use a great deal of grid electricity for their facilities and offices are still relying on natural gas, coal, nuclear, hydro, and now some pure renewables.
So who is not enjoying the sudden shift in oil fortunes? First, at the geopolitical level, the world’s petro-dictators — Vladimir Putin or fundamentalist oil-backed regimes, for example — will have less money. Automakers pushing toward more fuel efficient models will see a slowdown in demand, making it harder for them to meet the mandated fuel efficiency standards (cars and light trucks in the U.S. are supposed to rise to 54.5 mile per gallon by 2025).
But of course the big losers are the oil giants, which will see profits squeezed. This effect will likely be more pronounced for those focused on unconventional sources like fracked shale oil and oil sands. Estimates of the production costs of these sources vary tremendously by region and technology, but the story is not good in general. Shale oil may cost $50 to $100 a barrel, and the most efficient extraction methods for Canadian oil sands requires between $35 and $65 per barrel. Even if production costs are below current market prices, clearly $60 oil today means these methods are much less profitable. So investment in new projects would certainly drop and, in an interesting turn, the Keystone pipeline debate could become moot – who needs a conduit to unprofitable oil?
So for those cheering for a clean economy, a reduction in investment in some of the dirtiest sources of energy is a good thing, right? Sort of. The real problem is that a reduction in oil prices generally chills investment in renewables. We need the shift to clean energy that is rolling along now, both to tackle climate change and provide more resilience to businesses and our energy systems. Businesses that are free from reliance on volatile priced fuels are more stable and profitable – and this sudden oil price shift should confirm that “volatile” is an understatement. Also, what goes down also can go up; remember that oil also went from $70 to $148 in about a year in 2008.
In theory, oil prices shouldn’t impact investment in solar, wind, and other electricity sources since, again, oil is not a part of the electricity story here. But politicians and pundits purposefully (or ignorantly) confuse the two issues and use oil prices as a reason to fund (or not) clean energy. As a story in the New Republicpoints out,because Americans feel gas prices viscerally as they watch the pump numbers spin by, “rising oil prices typically have pushed policymakers to ramp up spending on subsidies for renewable sources, such as solar and wind. And … the last big drop in oil prices, in the early 1980s, prompted the United States to roll back renewable-energy spending.”
So if lower prices make governments and companies think twice about the aggressive investment in clean energy going on, it’s bad news for the climate and for all of us. Business depends not just on reasonably priced resources, but a stable climate.
Let’s hope that the companies that are moving quickly to renewable energy keep the faith, and remember that locking in lower energy prices with contracts for renewable power (or locking in free energy by buying their own panels and turbines) is just good business. They should ignore these dramatic oil swings and keep us moving toward tomorrow’s energy sources.
(This post first appeared at Harvard Business Review online.)
(Andrew’s new book, The Big Pivot, was named a Best Business Book of the Year by Strategy+Business Magazine! Get your copy here. See also Andrew’s TED talk on The Big Pivot. Sign up for Andrew Winston’s blog, via RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)
