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Oil at US$35: what price climate change?

Sunday, December 20, 2015

It’s been a big week for climate change—half a step forward, and two steps back.

Start with the good bit. The UN climate talks in Paris reached agreement; 195 countries (including this one) now aim to limit climate change to two degrees; with 1.5 degrees on the wish list. Each country laid out aspirations for cutting carbon emissions.

Tot up those pledges, some of them vaguely worded; they shave a thinnish slice off the upward-trending “business as usual” carbon curve. They don’t halt it. Even if each of the 195 sticks rigidly to target, it looks three degrees, or more.

T&T’s per capita carbon emissions are more than five times the world average. Qatar and Kuwait are the only independent countries with a higher figure. Our unambitious target is for power generation, transport and industry to dip 15 per cent below the “business as usual” trend by 2030. There’s no mention of cutting fuel subsidies. But unless we get lucky with gas finds, there’s going to be a steeper fall than that.

So, the Paris agreement makes half a step forward.

First step back: 2015 looks like the hottest year on record, one degree above the global long-term average. That beats the previous record, set in 2014. And the forecast for 2016 is hotter again. That 1.5 degree target is nearly shot already.

The current blip in temperatures is fuelled in part by the warm-water El Niño now in progress off the west coast of South America. On some measures (though not all) it’s the strongest El Niño on record. It will power worldwide temperature rises right through next year—though, with luck, 2017 will see a small respite.

The forecast for the first three months of 2016 is hot and dry in T&T and the northern half of South America. Watch your water tanks.

Next step back: the oil price slide. Crude dipped below US$35 on Monday last week, and again on Thursday. That’s bad news for T&T’s economy, and bad news for climate change.

To cut carbon emissions, the world needs to shift from fossil fuels to renewables. That means big-time investment in solar power, geothermal, wind energy, and probably nuclear power.

With oil at over US$100 in mid-2014, that looked realistic. With crude below US$35, the easy route is to praise up renewables as a distant goal, but put hard cash now into fossil fuels. For most of the Caribbean, that means fuel oil.

Dominica, St Kitts and other volcanic islands have been studying geothermal potential for years, but none has yet fully committed to a major investment. At current oil prices, it will be hard to attract private sector finance.

Guyana has dropped its ill-advised Amaila Falls hydroelectric scheme, and is looking for alternatives. To assess the economics, the developers will need oil price scenarios—not just for next year, but for 2020 and indeed for 2040 and 2050.

At the same time, low oil prices damp down exploration for offshore oil and gas. T&T’s prospects are in deep and ultra-deep waters, high cost and high risk. With oil at less than US$35 and gas prices to match, they don’t look enticing.

In last Tuesday’s debate, Republican presidential hopefuls obsessed and fretted over Isis. They scoffed at world leaders for meeting in Paris to talk about climate change, not Middle East terrorism.

Oddly, they didn’t touch on the link between Middle East politics and energy markets. They talked military stuff; shock and awe; not politics and reconstruction.

It’s not just Syria. Iraq, Libya and Yemen are in turmoil. Saudi Arabia, Egypt and the Gulf states are running on a fragile peace. Six months, two years, ten years down the line, who’s to say where they’ll be.

Outside the Middle East, Venezuela, Nigeria and Russia are not poster-guys for stability.

A major upset in a first-rank oil producer could send oil prices soaring fast, back to US$100 and beyond. If low prices have blocked investment in oil, gas and renewables in the intervening years, the shock will be in megavolts.

Energy planning needs a time horizon in decades. Energy politics and energy markets can shift in minutes. The two don’t mesh. And that matters.


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