As slumping oil prices spread political and economic uncertainty through many parts of the world it is becoming clear that a sudden abundance of cheap oil could offer governments opportunities for long-delayed reforms once they have weathered their current short-term crises. Some oil-dependent countries face immediate economic peril, however, and there are already signs of panic. In Canada, for instance, the halving of the oil price has wiped Cdn$$7 billion from the projected income of the province of Alberta, and it has forced the federal government to delay its budget as it takes stock of the likely shortfall in its own finances.
The shocks are most noticeable in countries that have failed to diversify their economies, and several are uncomfortably close to collapse. Faced with the likelihood that Venezuela would default on its foreign debt — as it simultaneously grapples with food shortages, rapid inflation and the collapse of its petroleum profits — President Maduro was clearly relieved to obtain Beijing’s US$20 billion aid package earlier this week, even though it is likely to prove little more than a temporary reprieve. Significantly, China (which has already given Venezuela US$50 billion in similar agreements since 2007) described the latest loan as a means of buttressing Venezuela’s efforts to “adjust its economic structure and build a production-oriented economic model” — a less than subtle hint that Beijing’s largesse may be less forthcoming in the future.
Amidst the uncertainty, many governments have a rare opportunity to reconfigure their economies, eliminating costly subsidies to fossil fuel sources of energy and supplying overdue incentives for green technologies. As it happens, while oil prices are plummeting so is the cost of several key green technologies. Thanks to annual global investments of more than US$250 billion during the last five years, many of these technologies are also significantly more efficient than their predecessors. But while political support for green energy remains strong, lower oil prices threaten to undermine plans for continued investment in renewable energy, despite its considerable long-term promise.
Electric cars are a good example of the dilemma that cheap oil creates. Currently they represent less than one per cent of the cars on America’s roads. Bloomberg analysts expected this to reach nearly 10 per cent during the next five years, but with current oil prices the projection falls to just 6 per cent. Tesla motors, one of the pioneering manufacturers of electric cars, recently watched its share price wobble after analysts concluded that cheap oil would probably constrain the mass appeal of electric cars and constrain the company’s short-term growth.
In addition to supporting newer technologies, governments have the opportunity to eliminate costly subsidies for fossil fuels — the Economist estimates that in 2014 governments spent US$550 billion on these. Not only do these encourage the overuse of ‘dirty’ energy, they also prevent governments from taxing carbon emissions at appropriate levels. Cheap oil prices create the ideal conditions for widespread carbon taxes that nudge consumers towards cleaner energies, or at least towards less exorbitant use of fossil fuels.
The petroleum industry recognizes how volatile its future has become, even if many governments don’t. Some of its best-known firms, despite a decade of obscene profits, have suddenly become vulnerable to takeovers. British Petroleum, for example, which not too long ago was forecasting robust growth, based on estimates of oil prices of $100, is now rumoured to be in the crosshairs of a takeover bid by Chevron, Exxon Mobil or Shell. Yet despite this uncertainty, there is still significant political pressure within the United States for the Obama administration to authorize the construction of the Keystone XL pipeline. Meanwhile projects like the ambitious US$6 billion scheme to link national power grids in the UK and Iceland — expensive in the short-term but likely to produce huge savings in the future — remain far less well-known and politically viable.
Cheap oil has altered the economic outlook for governments across the globe and it offers a rare chance for them to invest in a green future. Their success in doing so will depend largely on their willingness to forgo the easy exploitation of cheap and ‘dirty’ energy while supporting renewable technologies that may cost more to build but produce long-term savings and reduce our impact on the environment. Ultimately such a shift will require coordinated planning and a commitment across the political spectrum to avoid the now well-documented political and economic miscalculations of our collective dependence on fossil fuels.
