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Oil Plunge: Eroding or Accelerating the Sustainable Economy?
Crude oil prices have been falling precipitously all through the latter half of 2014, and every time they hit a new low, they have been making headlines. This has been the single greatest energy story since 2010 and the slump doesn’t seem to be abiding.
Brent Crude Oil1 prices fell below $50 a barrel as the first week of 2015 started, down from $114.83 in June’14 triggered by several factors:
- Increase in oil and shale gas production capacity in America due to fracking (total American oil and gas production reached 9 billion barrels a day in 2014, from 4.6 billion barrels a day in 2008),
- Re-establishment of operations in oil producing regions like Libya and Iraq, despite political unrest
- Falling demand in Europe, Japan and China caused by both slowdown of economic activity and a move towards fuel efficiency.
Figure 1: Brent Crude Oil Price (in US $); Sorce: Bloomberg Oil Prices
The high price of oil is always seen to be a driver for renewable energy, so it is but natural to expect that such a steep fall in prices would have an adverse impact on renewables.
However, the renewables sector in India, particularly wind and solar, doesn’t seem to be affected yet. This is partly because they directly compete with coal and not oil for producing electricity.
In contrast, companies which receive a significant share of their electricity from diesel generators will benefit from the lower price of fuel and continue to prefer diesel generators over renewables while the price of oil remains low.
However, since the action in India on renewables, particularly Solar, has been in most part been driven by government action and policy, the impact of the slump in oil prices is expected to be short-lived, delaying projects rather than shutting them down all together. With a strong policy push mandating renewable energy generation, the Indian government has been setting ambitious targets when it comes to renewable energy capacity and this is likely to continue, despite lower oil prices.
Recent policy announcements for encouraging growth of renewable energy
At the same time, since India imports more than 70 per cent of its oil consumption, falling global crude oil prices tend to create an overall macroeconomic boost.
Due to a reduction in India’s import bill, it is estimated that India’s annual Current Account Deficit could improve by up to $36 billion. The government also estimates that the lowered cost of oil will help India’s GDP growth increase to around 6.3% in 2015-16 from an estimated 5.6% in 2014-15, thus setting off multiple growth boosters linked to lower inflation and fiscal deficit. The falling oil price has also made it possible for the Finance Ministry to increase excise duty rates for petrol and diesel and mop up additional revenue of up to Rs. 150 billion ($2.5 billion) in the current year. This, would, in turn, allow for greater government expenditure on various infrastructure development projects.
The most significant positive impact of falling oil prices will be reaped by industries that use fuel as a source of energy-like aviation and the automobile sectors.
The fall in oil prices has driven up sales of petrol and diesel vehicles and subsequently affected the already poor sales of electric vehicles. The demand for cars has gone up in the last quarter of 2014 with automobile sales showing a growth of 9.5 % in November- December 2014. The cost of owning a petrol or diesel car has come down significantly with the fall in fuel prices. The price of petrol and diesel has fallen by Rs. 10 and Rs. 7 respectively in Delhi between June and December 2014. A Rs. 10 (per liter) fall in petrol prices leads to annual savings of around Rs. 10,000 for car owners.3
Figure 2: Number of Electric
Vehicles sold in India (2012-2014)
Electric vehicles, on the other hand, did not have a significant market in India to begin with. The electric vehicles market in India has been performing very poorly since 2012 after removal of subsidies on electric vehicles (Figure 2). This trend is expected to be exacerbated by the falling fuel prices, since the competitiveness of EVs reduce further as the price of fuels falls. The government subsidies for EVs are expected to be revived early in 2015, and it is likely that it would provide some respite to the Indian Electric Vehicles market.
Despite some of the negative impacts of the falling prices of oil on business sustainability, like delay of renewable energy projects and lower sales of electric vehicles, it is expected that in the short to mid-term, this might have significant positive impacts on global sustainability. For one, low oil prices could reduce oil and gas production globally. The falling prices mean that certain kinds of expensive drilling and extraction processes, like off-shore drilling and fracking will no longer be feasible. (Refer to Box 1) For instance, offshore drilling company, Transocean estimated that in the third quarter of 2014, their losses amounted to $2.17 billion, caused chiefly due to cancellation of contracts.
As the the US and OPEC refuse to rein in oil and gas production, there is a general wariness that has crept into the international markets. Some of the direst predictions involve the world being plunged into another recession because a sharp decline in oil prices proceeded the recession of 2008. Others believe that this is a temporary blip and while oil producing countries like Russia and Venezuela will face severe repercussions, the impact would not extend to other nations. Oil industry experts believe that when oil prices do recover, it will be a gradual process. In the meantime, India sits at a happy place and can reap the economic benefits of falling crude oil prices, and channel those funds into building more robust, climate-friendly and climate-resilient infrastructure.
- A global standard for indicating crude oil prices in the international market
- Assuming running of 30 km/day and mileage of 12 km/litre