The price of oil has plummeted since June 2014 and last week fell to its lowest level for 11 years. Natural gas prices, which are linked to oil prices, have been falling too. And in many countries, such as the US, the cost of coal has been dropping for a while.

Many analysts think prices will remain low for some time, because supplies are plentiful while demand is falling due to China’s economic woes.

This prospect has been widely welcomed, because low fuel prices will cut the cost of a big range of goods and services. But they could hinder efforts to minimise further climate change.

Lower prices are not all bad in climate terms. Many hard-to-extract fossil fuel sources, such as tar sands, are no longer profitable. Major companies are shelving plans to seek and develop new oil and gas fields, especially in remote places such as the Arctic, and some existing operations are being shut down.


This means some oil and gas supplies will be left in the ground – at least for the next few years. The trouble is that when prices rise again, these resources could be tapped. And we already have far greater reserves of fossil fuels than we can ever burn if we want to avoid catastrophic global warming.

No peak oil

“There is no peak oil,” says economist Ottmar Edenhofer, head of the Mercator Research Institute on Global Commons and Climate Change in Berlin, Germany. What is limited, he says, is the amount of space in the atmosphere for disposing of it.

One 2015 study estimated that of the known reserves, a third of oil, half of gas and 90 per cent of coal would have to remain in the ground to give us a chance of limiting warming to a safe level 2 °C or below. Yet even if countries stick to the commitments they made as part of the Paris agreement, we are still on track to burn enough of these reserves to take us above 2 °C sometime in the 2030s.

To avoid this, we will have to greatly speed up the switch to alternative fuels – yet it is precisely this transition that lower prices could hamper. Lower fuel prices encourage more consumption and reduce the incentives to improve energy efficiency. They also make it harder for renewables to compete.

There are already signs of this happening. In the US, vehicle sales hit record levels in 2015 – and ever more people are choosing fuel-guzzling SUVs and trucks instead of conventional cars. In the UK, British Airways has dropped a £340 million project to produce aviation fuel from household waste, citing lower oil prices as one reason. And Canadian mining company Iamgold has shelved plans to power one of its mines in West Africa with solar instead of oil.

Some argue that the fall in gas prices will lower emissions, by encouraging a switch from coal to gas for generating electricity. Cheap shale gas, they say, is what drove the reduction in the emissions in the US in recent years. But the economic recession was the main factor behind reduction in US emissions, according to economist Klaus Hubacek of the University of Maryland – cheap gas played only a minor role.

Renewables delay

And while cheap gas may indeed decrease emissions in the short term if it replaces coal there are two big catches. The first is that it will delay the switch to renewables, meaning higher emissions in the long run. Renewables would account for a larger share of US energy were it not for cheap gas, Hubacek says.

The second is that gas tends to displace coal rather than truly replace it. The coal it replaced in the US, for example, got exported and was burned elsewhere, Hubacek says.

In fact, while coal use is falling in most rich countries, cheaper prices worldwide have prompted a remarkable coal renaissance, says Edenhofer. Even if only a third of the planned coal power stations are built, we will still burn through the remaining carbon budget for 2 °C.

There is yet another problem with low fossil fuel prices: as several studies have shown, they lead to less investment in clean technologies, which can have consequences decades down the line.

Does all this mean that high oil prices are better in climate terms? No, says Edenhofer, both high and low prices are bad. Low prices encourage people to use more, while high prices encourage companies to find more.

It is therefore vital that governments seize the opportunity provided by low prices to introduce an effective form of carbon pricing, many economists agree. Carbon pricing discourages the use of fossil fuels, encourages investment in green technologies and raises revenue that can fund anything from tax cuts in other areas to renewable energy infrastructure, Edenhofer says.

There was much discussion of the need for carbon pricing on the fringes of the Paris summit, he says, so he hopes progress can be made.

What governments absolutely should not do – but what many are in fact doing – is to subsidise renewables or nuclear power without introducing carbon pricing, because this helps to lower fossil fuel prices.

“People in other places will use more fossil fuels because of the oversupply,” says Edenhofer. “This is the reason why it is so urgent that we have a carbon price – and why without carbon pricing climate policy cannot be successful.”

Read more: “Dump the pump: When oil will lose its lustre“

(Image: Eddie Seal/Bloomberg via Getty)