Analysis: Is a low or a high oil price needed to tackle climate change?


Photo credit: Kristina Kasputienė via Pixabay 

By Anders Lorenzen

The financial markets have been panicking since Monday last week (16th September) following attacks on Saudi oil infrastructure sent the oil price skyrocketing. The attacks were significant, not only for Saudi Arabia but also from a global perspective, as it shut down about 5% of the world’s oil capacity. It saw the biggest percentage gain in the price of Brent crude since the 1991 Gulf War. It could be months before the output is back to normal.

These events could be seen as yet another example of how the world economy is controlled by oil prices.

But when it comes to climate change and setting the pathway towards a zero-carbon world is it best to have a high or a low oil price?

Low or high oil price?

The short answer is that it really depends on who you ask or what your own perspective is. The New York Times columnist and author, Thomas Friedman, has argued for a lower oil price as being more sustainable, as this would stop oil companies receiving huge profits. With a high oil price, and as long as the demand is there, as it is at the moment, oil companies can use all those profits to invest in expensive projects. For instance for drilling for the harder- to- reach oil such as Arctic oil, in fracking or investing in projects in unstable countries. As the news unfolded over the weekend, the stock markets on Monday responded by giving a boost to global oil giants, counting on further demand for their oil which could continue to push up the price. Other companies in the economy who are dependant on oil for their businesses such as airlines saw a drop in their share price.

But the other side of the coin is, that unless governments intervene the higher cost of oil would also mean that petrol prices will increase. Consumers then would either cut down on car usage or use other forms of transport. And this would make driving an electric vehicle (EV) even more attractive as, of course, it is not bound by the oil price.

The benefits of a low oil price are in fact the reverse. Oil companies will not be able to invest in risky and expensive oil projects , which is why the industry has made a concerted effort to push up the oil price in recent years. On the other hand, a cheaper oil price will mean cheaper petrol prices, which could result in consumers spending more on driving and petrol as well as on flying.


So, in reality, there’s no perfect scenario and there are pros and cons with both. High oil prices would mean that oil companies could start investing in new risky oil projects which we can’t afford to do if we are serious about tackling climate change. And low oil prices could slow down the pace of the decarbonisation revolution as it will be harder for EVs to compete with petrol cars with low oil prices. The reality is, that in order to avert the worst of the climate crisis, the world economy must transition away from oil at a high price or a low price, and do it fast.




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