Should environmentalists rejoice or despair over negative oil prices?

When this global recession ends, the same underlying challenge will likely be there for responsible policymakers – discourage the use of fossil fuels and encourage renewables, writes Ben Chu

So how should we think about this murderous week on the oil markets and the battle against climate change? (AP)

If one accepts that global warming is the pre-eminent danger facing humanity on earth – surpassing even pandemics in potential harm – it’s rather difficult to know how to take the fact that oil prices this week crashed to zero, even at one point going negative.

Rejoice or despair?

On the one hand it represents a catastrophic shock to some oil producers. A price crash on this scale represents an existential challenge to dozens of shale oil miners in the US whose proliferation in recent years has turned America into the world’s largest national oil producer.

That’s wretched news for those companies and their employees, but in the context of containing climate change it has to be welcome that they will no longer be mining those planet-warming fossil fuels.

Some analysts also think the cratering stock prices of listed oil companies could see investors shun them permanently.

That’s the case for rejoicing.

Yet a price crash has other economic effects too. Most obviously it makes this fossil fuel a much cheaper energy source than before.

The objective of public subsidies for renewable energy like wind, solar and wave power has been to make them more price competitive and incentivise industry to switch. The purpose of carbon taxes on fossil fuels is, of course, the reverse. The oil price crash risks undoing a great deal of those renewable market price incentives.

That’s the case for despair.

So how should we think about this murderous week on the oil markets and the battle against climate change?

It’s vital to separate the short term from the medium and long term.

The dominant, underlying, driver of the collapse in oil prices in the past six weeks has been the collapse in global economic activity. And this, in turn, has been driven by the lockdowns imposed by governments to prevent the spread of this new coronavirus.

We don’t know when those lockdowns will end, yet they will at some point.

Global economic activity will pick up and so will demand for fuel, including oil.

It may be that the price of oil will remain much weaker than in previous decades but it’s highly unlikely to be zero.

And bear in mind that the zero – even negative – prices of some futures contracts reflects a temporary dysfunction in the market due to a glut of supply and severe lack of storage capacity, with many traders merely desperate to get the stuff off their hands so they don’t have to take delivery.

What matters from the perspective of crushing down our use of climate-warming fossil fuels is medium and long-term fuel prices, not their nadir in the crash.

As my colleague Ben Chapman has reported, some analysts think that prices could actually spike dramatically when global demand returns because so much producing capacity will have been wiped out for good by this trauma that supply will not be able to keep pace.

It’s possible this fossil fuel price explosion could increase demand for relatively cheaper renewables.

However, it’s also possible that countries with large and easily accessible reserves like Saudi Arabia could rapidly increase their own production to cash in, bringing the price back down again.

Saudi Arabia’s decision to jack up oil production last month in the teeth of slumping prices looked bizarre and self-harming on the face of it.

But one of the reasons that analysts suspect the kingdom took this gamble was the belief that a price crash would force US shale oil producers out of business and allow it to emerge from the crisis with a larger market share for itself.

Dieter Helm, the respected energy expert, is one of those who is pessimistic about the impact of the Covid-19 pandemic on our civilisation’s battle against runaway climate change.

“A falling oil price, and cheap gas and cheaper coal, will encourage China and India, as well as other big developing countries, to hold onto their existing capacity, and indeed like China build more,” he says.

The reality is that when it comes to forecasting oil prices over any time horizon, we see through a glass that’s more smudged than a roughneck’s protective goggles.

So, in that sense the oil price crash is cause for neither rejoicing nor despair.

When this global recession ends, the same underlying challenge will likely be there for responsible policymakers.

They will need to use regulation and taxes to encourage the use of renewable forms of energy and to discourage the use of fossil fuels. They will need to use the power and money of the state to subsidise research into zero-carbon technologies.

Ultimately, they need to make the price of oil an irrelevance by fundamentally changing the way our industries, homes and means of transport are powered.

As the saying goes, the stone age did not end because the world ran out of stones.

The fossil fuel age will not end because of swings in the price of fossil fuels, but because we will have created an entirely new and clean energy economy.