Continuing slump in oil prices will slow electric vehicle market and biofuel use, experts say

Source: Lisa Friedman, E&E reporter • Posted: Wednesday, July 22, 2015

Sinking oil prices will affect climate change policies in different ways in different countries, a new Council on Foreign Relations report finds.

The report is based on the findings of a closed-door discussion the nonprofit think tank held during the spring with leading economists, oil market experts, climate policy analysts and others.

Michael Levi, a senior fellow at CFR who co-hosted the talks, said part of the aim of the meeting was to bring together experts in related fields whose policy circles rarely overlap.

“People who understand oil markets typically don’t talk to people who understand renewable fuels, climate policy or renewable energy, so we wanted to bring people together from these worlds,” he said. “Otherwise, you’re not going to understand what the policy opportunities and vulnerabilities are.”

The discussions revealed sharp differences in opinions and assumptions about the oil price slump that began last year, including where oil prices are headed and what the impacts will be on energy policies in the United States and abroad.

According to the report, the participants agreed that oil prices will likely remain low for the next few years, but in the long term a majority felt that prices would return to $100 per barrel or higher. On the other hand, it noted, some felt clean energy and global climate policies could displace oil demand and thereby keep prices low.

In the short term, that means “bad news” for alternative fuels, including biofuels and hybrid and electric vehicles, the report says.

“The recent drop in oil prices has also significantly lessened commercial appetite for vehicles powered by liquefied or compressed natural gas. ‘The thrill is gone,’ said one participant, recalling recent enthusiasm among long-haul trucking fleets that were able to repay the cost of converting diesel semis to burn natural gas in just a couple of years,” the report notes.

But, it adds, natural gas vehicles could still thrive since natural gas prices do not spike when oil and diesel prices do.

But when it comes to low-carbon energy, Levi said, “The oil price drop is not nearly as bad for renewable energy as people imagine at first glance. But that doesn’t mean it’s totally disconnected.” He said the big wild card is if renewable energy policies weaken in the face of dipping prices.

“Even if it is unjustified, lower oil prices tend to make people less interested in energy policy in general, and that includes climate policy,” he said.

But even that doesn’t hold true in all parts of the world, the report notes. The authors point to Middle East electricity generation, where oil is particularly prominent and undermining the economic case for major solar investments, and then Asia, where natural gas prices are linked to oil prices and have taken a similar plunge.

“In the United States, the picture is much more mixed,” the authors write. “That is because natural gas is the crucial fuel for determining wholesale power prices, while oil is barely used for power generation. But the price of oil has indirect effects on the outlook for wind and solar. Oil prices can affect the production — and therefore price — of natural gas. And when natural gas is relatively cheap, alternatives including wind, solar, and even nuclear power have trouble competing.

“Ultimately, though, renewable energy in the United States is most strongly affected not by oil prices, but by policies that encourage clean energy,” the report says.