Fracking & Renewables – The End of Oil as We Know It

Fracking and cheap oil aren’t going to kill renewables – they’re going to bring them to life. Doug Woodring explains why this time is different, with technology, national priorities and economics poised to drive The Age of Renewable Energy.

Photo: Solar PV power generation in Hong Kong – credit to Wikipedia user Wing1990hk


 

The Paris COP21 Climate Agreement in December was amazing unto itself, but now the world needs to act on this collective momentum. Many wonder who will lead the charge and where the “big wins” will come from. A breathtaking 187 countries agreed to make ‘Intended Nationally Determined Contributions” (INDCs) to control the impacts of CO2 on our environment. The resolution of those countries will be supported by a large and unexpected global gift: Oil at $30/barrel – or even less.

First, fracking

It started with fracking, a process that allows extraction of gas from shale in previously unreachable locations in large quantities and with relative ease. The switch from dirtier oil and coal to clean(er) gas had begun. Fracking disrupted fossil fuel economics and been a major factor in the price drop of oil as infrastructure adapted to the supply of a cheaper alternative. The rapidity of improvement in fracking technology and proliferation of projects, almost in internet time, virtually guarantees that oil prices will not rise for a long time to come.

This means that the large incumbent oil companies and petro-nations who have relied on high prices and, often, government subsidies, have had the rug pulled out from under their feet, with a multitude of smaller players now competing to supply energy markets.

Down, down, down

Large oil industry players no longer have the resources or the stakeholder approval to make new big investments in wells which are increasingly more expensive. Over $3 trillion have been wiped off companies’ collected stock market value since prices have fallen. Earnings in the S&P 500’s energy sector is down by 76%. Of the U.S. syndicated loans for the oil and gas industry (US$256 billion), 15% are now regarded as distressed. [1] Looking to the future, electric vehicles are on the rise, reducing demand for oil for cars, trucks, buses and the like.

But as oil prices dropped even further, they impact all fossil fuel prices. Low oil prices mean “big oil” companies are hemorrhaging money, especially in projects with high extraction costs. Many firms are laying off staff in droves. Even fracking is being impacted and new, small fracking players can’t find funding for new projects.But as soon as prices trend upwards, they will be back in production again, ensuring a medium to long-term oversupply in the market. So, where will investment go? To clean energy.

New priorities

In the past, governments would have provided support for the fossil fuel industry. Now, countries who supported the industry directly are now much less inclined to subsidise heavy polluters, preferring instead to re-allocate spending to long neglected infrastructure and services. For most countries, this includes clean energy supply and investments in technology. For countries that subsidised consumer prices, the social pressure to keep prices artificially low is also greatly reduced – they’re already there, naturally.

Smart money will now begin to shift to where it belongs: In long-term investments for clean energy.

Countries will now be even more supportive than before for renewable energy options as a consequence of each nation’s’ commitment to the Paris COP21 Agreement and their voluntarily chosen INDCs. In addition, the new 17 Sustainable Development Goals (SDGs), revised by the United Nations in September, are now being more widely adopted by multinationals and governments alike. They promote, among other objectives, more sustainable business models. New investments in clean energy are smart because they also come with reduced liabilities by avoiding risk in the form of carbon taxes or offset fees, pension fund divestment pressure, and poor brand reputation.

Renewables ready

The fiscal bloodbath in ‘old energy’ is happening simultaneously with with scaled advances in solar, wind and other clean technologies, bringing their prices down even further, while uptake and installations escalate. This is coupled with the rapid growth of electric vehicles and battery capacity with the likes of Tesla and Panasonic entering the market with new products. Regional trade agreements within the Asia Pacific Economic Cooperation (APEC) reduce the tariffs on clean-tech equipment to 5% or less between all member states, prompting efficient trade in these technologies. Those same members collectively aim to double renewable energy generation by 2020 and reduce energy intensity 45% by 2035.[2]

Fossils business = risky business

Long term investors and lenders must carefully consider 30-year infrastructure bets on oil, and even coal, both which carry significant new uncertainties with them. Taxes, legislation, pricing and consumer preference all seem to be weighed against old fossil fuels. Short term money will steer clear of these dirty energy sources for the immediate future. Renewables will fill the gap for rising energy needs. Investments in environmental goods and services are expected to grow from US$500 billion today, to US$2 trillion within five years.[3]

The perfect storm is here, but it has come in via the back door and has caught everyone by surprise. The mindset among some continues to be that “low oil prices will kill off innovation.” Not this time. It only takes a year or two in this day and age for innovations and scale to take root. All the right factors are now in place for the Renewable Energy Age to take hold at speeds that none of us expected. Long live new energy.

 

Doug Woodring

Doug Woodring

Director and Co-founder at Ocean Recovery Alliance
Co-Founder of the non-profit organization Ocean Recovery Alliance and the Plasticity Forum. The group is the first to have worked with both UNEP and the World Bank on plastic pollution issues, each based around two Clinton Global Initiative programs. He has an MBA from The Wharton School, a Masters in International Economics and Relations from Johns Hopkins (SAIS), and a BA from U.C. Berkeley. He has worked in Asia for over 20 years, and is a UNEP Climate Hero. He speaks frequently at events, as well as writes articles on environmental topics. One example is this article for The Economist on the Broken Windows Theory in relation to water pollution.
Doug Woodring