Guest Editorial: Climate Policy with Low Oil Prices

Abstract

Guest editorial Although oil experienced an extraordinary price increase over the past 4 decades, a turning point has been reached where scarcity, uncertain supply, and high prices will be replaced by abundance, undisturbed availability, and suppressed price levels in the decades to come. In our new book, The Price of Oil, we conclude that the shale revolution will yield an increased output of oil in the world totaling nearly 20 million B/D by 2035. We also assert that a “conventional oil revolution”—the application of horizontal drilling and hydraulic fracturing to conventional oil formations in the world—will yield a further addition of almost 20 million B/D in the same period. This extra 40 million B/D is nearly twice as much as the global increase in oil production in the 20-year period from 1994 to 2014. As these new production revolutions develop and expand internationally, they are bound to have a strong price-depressing impact, either by preventing price rises from the levels observed in 2015 (the Brent spot price averaged USD 53/bbl), or by pushing prices back to these levels if an early upward reaction takes place. Our optimistic scenario sees a price of USD 40/bbl by 2035. Without serious climate policy restrictions, the use of cheaper oil will likely grow and extend its life expectancy throughout the global energy system. The Carbon Bubble Fallacy A deep climate policy is one that ensures that CO2 concentrations in the atmosphere do not exceed a doubling from pre-industrial levels throughout the 21st century, believed to be a warming of about 2 degrees Celsius. Such a policy would require global emission cuts of 30% by 2035, and no less than 50% by 2050, compared with 2011 levels. There is little doubt that implementation of climate policy this ambitious implies the end of the recent revolution in oil production. There have also been widespread claims that such a policy would result in massive stranded assets in the fossil fuel industries. Would sizable proved reserves remaining in the ground due to a deep climate policy constitute a serious problem to the fossil industries? We do not think so, or else, the reserves would never have been created on such a prevalent scale. In the case of oil, the reason proved reserves have been created to last more than 50 years into the future, at present production levels, is that investment in reserve creation is relatively small in relation to total production costs, and therefore worth the companies’ while to assure reasonable peace of mind about future production potential.