The oil and gas markets are currently experiencing a double shock. The unexpected price war between Saudi Arabia and Russia has unleashed a flood of supply, while the COVID-19 pandemic has caused a dramatic drop in global fuel demand.
As a result, oil prices have crashed below the US$30 mark and the subsequent economic crisis could have profound consequences on the current global effort to move to cleaner energy.
Historically, logic would suggest that a falling oil price would have devastating effects for renewable energy on several fronts.
Firstly, electric vehicles will be less price competitive than their gasoline-powered counterparts, as the cost for gasoline at the pump drops. It also may result in energy companies shifting focus to natural gas production, in turn bringing gas prices down and making solar and wind less competitive as sources of electricity. Secondly, when governments and major oil companies are forced to cut spending, renewable investments are likely to be hit first.
Based on this logic, in the short-term, it is highly likely that the COVID-19 coronavirus pandemic and current oil price war will have a negative impact on the global energy transition. However, in the long-term, there is more optimism that the current situation could accelerate the adoption of clean energy.
Most analysts believe that basic supply and demand economics will assist in the recovery of oil prices. However, the sudden unpredictable changes in the markets over the past few years, will weigh on investors minds for some time to come.
Oil markets have long since resembled a wholly competitive market, and for the past few decades, prices have been regularly impacted by OPEC and allied producers, through sudden and unprecedented variations. Events such as the current price war between Russia and Saudi Arabia shows that OPEC and allied nations still maintain substantial influence over the fate of oil producers and oil prices. This extensive influence is unlikely to be forgotten.
In contrast, renewables have no supply risk at all, and are only exposed to changes in the price of electricity. Consequently, as oil prices come down, many experts believe that stakeholders will start to move their attention to less risky investments, that offer more durable returns, with a more favourable ‘corporate social responsibility (CSR)’ image.
This is not to say that renewables won’t face headwinds in the current environment. Renewable energy is set to suffer in the short term, but the oil price crash may well serve as a turning point for the clean energy transition.
Other Al Attiyah Foundation Special Reports and articles can be downloaded from their website, at abhafoundation.org.