News•June 21, 2016

Extreme Oil Prices May Be Costly to the Climate

When oil and gas prices go to extremes, such as when they crashed two years ago, scientists begin to look for answers about what those prices mean for climate change — especially when cheap oil encourages people to guzzle more gasoline in less fuel-efficient vehicles.

A new study shows that if oil and gas prices remain at either extreme — very high or very low — for long periods of time, they are likely to prevent countries from keeping global warming from exceeding 2°C (3.6°F). That’s especially the case if countries do not have climate policies, such as carbon pricing, that try to aggressively cap carbon emissions.

Oil wells in North Dakota.
Credit: Geof Wilson/flickr

If oil and gas prices remain low — less than $55 per barrel — for decades, it will be a disincentive to develop renewable energy and decarbonize the global economy, according to the research by the World Bank and the International Institute for Applied Systems Analysis (IIASA).

If oil and gas prices stay high for decades — $110 per barrel or more — oil demand still won’t be knocked down sufficiently to drastically reduce carbon emissions. High oil and gas prices encourage some renewables development, but their climate benefits are partially cancelled out by coal production. Coal gets a boost from high oil prices because it’s a cheaper alternative to natural gas, the research shows.

“High oil prices will not be a climate savior any more than low prices will lead to climate catastrophe,” said study lead author David McCollum, an IIASA researcher. “If the world is really serious about meeting the kind of tight carbon budgets that are required for 2°C or lower, then strong climate policy signals that put a sizeable price on carbon will be needed.”

Carbon pricing is needed to cut greenhouse gas emissions during long periods of both low and high oil prices, he said. Cheap oil calls for a higher carbon price because there will be higher demand for fossil fuels and less incentive to develop renewables. Expensive oil calls for a lower carbon price because expanded renewables development will offset some of the emissions from increased coal production, the study says.

The study, published last week in the journal Nature Energy, also underscores the “surprising” importance of natural gas prices in finding a solution to climate change, said Andrew Logan, director of the oil and gas program at business and climate think tank Cires, which is unaffiliated with the research.

Natural gas prices and oil prices historically rise and fall together — something known as “coupling,” which has significant climate implications. When oil prices are low as they are today, the corresponding low natural gas prices encourage electric utilities to build natural gas power plants and close their coal-fired power plants, which are major contributors to climate change. Natural gas emits about half the carbon as coal when used to generate electricity.

The study says that the coupling of oil and gas prices in the future is uncertain. But if coupling continues through a decades-long period of very high oil prices, carbon emissions will rise because expensive natural gas will encourage more coal to be used for electricity.

Low oil prices have led to a dive in gasoline prices across the U.S. since June 2014.
Credit: Andrew Mager/flickr

Conversely, if coupling continues through decades of low oil prices, the climate will benefit because coal won’t be able compete with cheap natural gas. But cheap oil is likely to slow the expansion of renewables, too, undermining the climate benefit of expanded natural gas production and countries’ ability to help decarbonize the global economy, the study says.

“From a climate perspective, a reduction in coal is a good thing, whereas a reduction in renewables is not so good,” McCollum said.

Logan said the study adds important nuance to what has been a long-standing debate over how much oil prices affect the transition to a low-carbon economy.

“While this is just a single paper, it does suggest that we need to approach climate policy with an eye toward addressing the impacts of oil prices, particularly low oil prices,” he said.

Rob Jackson, a professor of Earth system science at Stanford University who is unaffiliated with the study, said he questions the study’s assumption that oil and natural gas prices will rise and fall together for the foreseeable future.

“I'm unconvinced that natural gas and oil prices will stay so closely coupled,” he said, adding that more hydraulic fracturing and liquified natural gas terminals should reduce oil and gas prices’ dependence on one another.

“We can't tell how much natural gas might compete with coal and renewables in the future because the paper doesn't include such a scenario,” Jackson said.

Logan said that as oil has become a less important fuel for heating and electric power generation, there is no logical reason for oil and natural gas prices to be coupled.

“With the shale gas revolution of the past decade and significant overcapacity in the global LNG (liquefied natural gas) market, the prices of the fuels have begun to decouple, and I suspect this trend will accelerate going forward,” Logan said. “What this paper underscores is that this change, in the near-term, has potentially significant and positive implications for the climate. Of course, in the longer term such a decoupling could prove damaging as sustained low natural gas prices are likely to hinder investment in clean energy.”