Don't drill, baby, don't drill: Positive and negative impacts of the recent oil crash

Hummer time?
CC BY-SA 2.0 Flickr

Lately it seems like it's hard to go a day without hearing about oil prices and how fast they are falling. As I write this, a barrel of West Texas Intermedia crude oil goes for about $55. Just in July of this year, it was going for over $100/barrel, and prices hit a recent high of $140/barrel in 2008, right before the financial crisis made demand for everything tank. From an economic point of view, it looks like this crash in oil prices could turn out to be the story of the year, and maybe the story of 2015 (who knows what the future will bring, though).

PD/Public Domain

What does this mean for our planet, though?

Old wise men and women will tell you that this is very bad, because "it will kill alternative energy and electric cars, like it did when oil prices fell after the oil embargo of the 1970s".

WTI/Screen capture

There is definitely some truth there, and the "CONS of low oil prices" side of the ledger is definitely well furnished. But there is also a "PRO" side that often gets overlooked. Let's step back a bit, and look at both sides of the coin.

BAD

First the negative impacts, because they are easier to predict from past oil crashes: Yes, there might be a SUV revival. A certain percentage of the population, especially in the US where gas taxes are very low, seem to buy vehicles by the pound and they get whatever they can afford to fill up. This is a bit mitigated because, unlike in the past few decades, fuel economy standards in the US have actually been rising and modern vehicles - even SUVs - tend to be significantly more fuel efficient than they were just a few years ago.

Just look at the latest numbers from the Transportation Research Institute at the University of Michigan:

© UMTRI

There's still a lot of inertia left in the recent CAFE fuel economy standards, with the target of 34.1 MPG by 2016 and 54 MPG by 2025 still pushing automakers to improve at a good pace.

Who knows how long oil prices will stay low, so it's doubtful anyone is scrapping long-term R&D efficiency projects right now.

Flickr/CC BY-SA 2.0

There might also be a negative impact on clean energy, though there again the impact shouldn't be overstated. The US was a lot more dependent on oil in the 1970s than it is now, when the first big push for renewables began because of the oil embargo. This is a double-edged sword; it meant that when oil prices fell, investments in alternatives also tanked.

But that's in good part because these alternatives were so much more expensive than oil then that they couldn't stand on their own. Today, the price of wind and solar power is much lower and competitive with fossil fuels in many places, and getting more competitive every year. Just look at this great chart that shows the price per watt of solar power over time:

© BNEF

Also, let's not forget that oil has very little to do with electricity generation, so it doesn't directly affect most clean energy projects.

Electric cars and hybrids are more directly in oil's crosshairs, though. But even they probably won't be hit as hard as they would have been just 10-15 years ago. That's because the early hybrids were mostly sold as a way to save a bit on gas. There was little else that was attractive about the very first generation Prius and Honda Insight except the MPG numbers.

Youtube/Screen capture

Today, regular hybrids have improved a lot, but the real action is with plug-ins. Fully electric cars like the Tesla Model S are sold on the basis that they are the very best vehicle that you can buy, they just happen to be electric because electric motors are superior to gasoline engines. Nobody is buying a Tesla to save money on gas (it's not exactly a cheap set of wheels). Thanks to all the plug-ins on the market today, people are realizing that there's more than MPG that matters, and electric motors with tons of torque are fun to drive, quiet, can be charged at home, and are environmentally-friendly.

So no doubt low gas prices will hurt plug-in sales, but as long as ever more appealing plug-ins keep coming out, we're certainly not in a life-or-death situation for the industry. It's the same idea as with renewable energy in the 1970s vs. today. Electric cars weren't competitive in the past, but now the technology has advanced enough that they stand on their own.

Wikimedia/CC BY-SA 3.0

GOOD

So is there anything good that can come from this?

Other than more money in the pockets of regular people, which shouldn't be underestimated, low oil prices are also a death sentence for all kinds of very environmentally damaging projects. While the crash was still going on all kinds of oil companies announced that they would scrap projects or reduce their capital spending. Here are just a few examples:

-Chevron cancels Canadian Arctic drilling as oil prices slide

-Marathon Oil cuts 2015 capex 20 percent as crude tumbles

-The Oil Giants Are Starting To Slash Costs

So we might see a lot less oil drilling and development on the ground, but especially in hard-to-reach places like deep waters and in the Arctic, and for expensive-to-produce (and environmentally damaging) deposits like Canada's tar sands. These are very sensitive places where, if something goes wrong, it's very hard to do anything about it. We saw how hard it was to stop the BP oil spill a few years ago, and that was in the Gulf of Mexico. Imagine if that had happened above the Arctic circle, far from everything.

eschipul via Flickr/CC BY-SA 2.0

UGLY?

What's scary is the longer term impact that low oil prices could have on various policymakers. Will efforts to reduce greenhouse gas emissions, and so to switch to cleaner sources of energy and to improve energy-efficiency, be derailed? Will pressure from the voters diminish because, although the real problems aren't solved, pressure on their wallets might ease?

A time of low oil prices might be the perfect opportunity to do some policy-judo and create a carbon tax on oil products, even if only to use the money raised to lower income taxes so that the whole thing is revenue neutral; people wouldn't pay a cent more even if they don't do anything differently, but if they choose to reduce their oil consumption, they would save money compared to the status quo. Now that's aligning incentives!

But even just a higher gasoline tax to fund infrastructure projects (including transit and bike infrastructure) would make all the sense in the world. The US has a gas tax that is a fixed number of cents per gallon, so as prices go up and inflation eats away the buying power of the dollar, the actual money raised goes down. This doesn't make any sense. Gas taxes should be a percentage, or at least indexed to inflation.

Tags: Oil

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