International Developments

Oil market crash: What does it mean for green recovery and renewable energy?

COVID-19 has dragged the world economy into a boxing match with unlimited rounds, danced around like Mohammad Ali and smashed it into pulp. An end is nowhere in sight.

In the last 3 months, the global manufacturing industry has shrunk to its lowest levels since the 2008 financial crisis. Airlines are expected to lose up to USD 314 billion in 2020 due to the pandemic; the shock could extend into 2021 as passengers avoid international travel. The automotive industry is bracing for low demands—sales forecasts suggest a drop of 12% in the number of units sold in 2020 compared to 2019.

The disruptions in production and consumption have culminated in an almighty fall of the oil markets. Notably, on 21 April, the West Texas Intermediate (the US price index for oil) crashed to negative prices. Crude oil flooded the market (no pun intended), storage space was scarce and exorbitantly priced, and oil sellers were paying buyers to take their crude oil.

This oil market crash could have a direct bearing on how countries recover their economies.

An unprecedented opportunity…

This near-complete halt in the global economy is an unprecedented opportunity to restart the system—almost from scratch—on a more environment-friendly, climate-resilient path. “Green Recovery” is the buzzword.

A key aspect of Green Recovery is a switch to renewable energy.

In its 2020 Global Renewables Outlook, the International Renewable Energy Agency (IRENA) has called for investments into flexible power grids, efficiency solutions, electric vehicle charging systems, energy storage, interconnected hydropower, green hydrogen and multiple other clean energy technologies.

The report claims that these investments would create jobs in energy efficiency, electric mobility, power grids and related sectors that would outweigh the potential job losses because of the transition to renewable energy. In the long-term, this transition would require USD 19 trillion in investments, but would bring returns between USD 50 trillion and USD 142 trillion.

But after the oil market crash…

…the cost of green recovery, and renewable energy in particular, will seem much more expensive.

Governments are under severe pressure to restore normalcy in the economy. With rising unemployment and increasing healthcare expenditure, governments are strapped for cash and may be unwilling to stimulate costlier recovery options. There are many countries (notably in the European Union) with the political will to generate green stimulus packages, but just as many countries that will look to kick-start their economies with the least expensive option: in this case, fossil fuels. It doesn’t help that businesses reeling from the economic downturn are urging governments to relax emission norms until growth is back on track.

This has happened before. After the 2008 financial crisis, global emissions fell by 1.4% in 2009. But in restarting the economy, emissions from fossil fuel combustion and cement production grew 5.9% in 2010.

Countries are also wary of China now…

China is being blamed for the spread of the pandemic. Markets are wary of Chinese exports. Companies that suffered when China shut down are looking to de-risk investments by diversifying out of the country. This stigma could also negatively impact the renewable energy transition, as China is the global leader in this sector. For example, China makes over 60% of the world’s solar panels and exports a significant share of this production.

It will take some time before countries develop the technology to manufacture renewable energy paraphernalia at competitive costs within their countries. In between, fossil fuels become an attractive option.

What about the long-term?

The long-term seems less bleak. The climate crisis is not getting any better and organizations like the United Nations are constantly reminding us of this. The long-term global goal should be to a carbon-neutral future. That means less fossil fuel use (we cannot avoid it completely, of course).

Economically, the volatility of oil markets has been spectacularly displayed over the last week. Investors may want to diversify into renewable sources of energy to avoid such rude shocks in the future. Also, once the oil market recovers, prices will rise and make renewables more competitive again.

We can be cautiously optimistic about the long-term and anticipate the worst in the short-term for the renewable energy sector.


Co-authored by Sreeram Sridhar.

Image credits: Photos by Pixabay on Pexels (https://www.pexels.com/photo/black-and-silver-solar-panels-159397/ and https://www.pexels.com/photo/gray-industrial-machine-during-golden-hour-162568/)

2 replies »

  1. Agreed this is a great opportunity. Sadly here in the US the renewable jobs have taken a bit hit and the federal government isn’t stepping up its relief effort. E.g., solar panel installations are typically done by small local contractors, many of them are losing major revenue at the moment. It really is a shame.

    Liked by 1 person

    • It really is.
      And I believe your President released a statement saying they’re going to take all the oil they can if it’s just being given away.
      Green recovery is not in the administration’s mind at all.
      With the tarrifs on solar panels and now this, the small contractors are having a really hard 2-3 years :/

      Like

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