The recent drop in oil prices is generally referred to as a ‘Saudi-Russian price war’. This is a wrong description. Two things are happening. Firstly, as renewables are becoming cheaper and cheaper, oil is becoming increasingly irrelevant, and all countries with large oil deposits are scrambling to get as much as possible out of the ground before it is too late. Secondly, the OPEC+ oil cartel has failed, as outsiders – often called ‘free riders’ – have increased production so much that the cartel is no longer worth while. These two factors are the death knell for OPEC+ and high price oil – the good times for the oil industry will never come back. The fall in demand because of COVID-19 is not the cause, it is only the trigger.
Independently of the outcome of the Paris Climate Change summit, big oil and coal have started an irreversible decline, facing the competition from renewable energies and an increasing political pressure to de-carbonize our societies. This changes completely the game and eliminates the incentive to reduce supply to get higher prices. In stead, the rush is now to exploit the oil and gas before it is too late. Who comes too late, loses. So OPEC has lost its power for good, and there is no chance it will get it back again.
As oil prices have plummeted, they have overshadowed the other important reality: renewable energy prices are also falling. And contrary to oil prices, the fall will continue in the future. So renewables are becoming a viable and profitable alternative for electricity generation, helping the world to get off its dependency on fossil fuels. But what about cars? They are intimately linked to fossil fuels, or – if need be – biofuels, to make the internal combustion engine work. Worldwide, transport is actually responsible for around 27% of all energy consumption, and 63% of oil consumption. So is there any future for renewables here?
The recent fall in oil prices has obscured another tendency: renewable energy and energy storage is fast becoming cheaper. In the lack of political will to face the global warming, this fall in the price of renewable energy is now our best hope to assure that much of the coal, oil and gas will stay in the underground, as it will only be profitable to exploit the deposits that are easy to access. We are not there yet, but we may come there faster than expected. So we may be at the turning point for fossil energy.
As oil prices have plummeted, the question has naturally come up: does this mean the end for renewable energies? Can they compete with this cheap fossil energy? The short answer is: yes, it will of course now be less profitable to invest in renewable energies. However, paradoxically, the longer story is more complex. Wind energy is already competitive with fossil energy, and solar has also passed the break-even point in more sunny places. And unlike non-renewable energy sources, the long run trend is towards falling costs. So we may be at a turning point for the fossil energy.
We have heard a lot of nonsense about oil the last couple of months. First we were told that the fall in the oil price would continue to 20 dollars per barrel or even lower – from 100 dollars less than a year ago. Secondly that the fall in the oil price would not affect the US shale oil and gas miracle – US technology and prowess would outsmart the low cost producers as Saudi Arabia. Then, when the number of active oil rigs in operation in the US fell to half, we heard that there was not any connection any more between drilling and production. Of course it now turns out that it is all just that: nonsense.