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What Does The Oil Price Crisis Mean For The Energy Transition?

Ramanan Krishnamoorti, Chief Energy Officer

The current crisis facing the oil industry happened seemingly overnight, the result of a two-pronged situation: the economic slowdown caused by the global COVID-19 pandemic and the predatory attempt by Saudi Arabia and Russia to eliminate competition from the American energy industry. 

The fallout, however, may be felt for years, and in disparate ways. The move to zero-carbon energy and even the electrification of the vehicle fleet are likely to be slowed. The oil majors’ hold on the Permian Basin will grow stronger. And traditional energy companies may shift priorities from environmental and corporate social responsibility initiatives preferring instead to focus on employee safety, community health and profits over a broader remit.  

How did we get here?  

The American energy revolution, centered around the Permian in West Texas and New Mexico, was fast-evolving from an industry dominated by small and medium sized independent producers, powered by ingenuity and the clever application of disruptive technologies and business ideas, to an industry dominated by integrated energy companies. Those oil majors swept into the shale fields and have used assembly-line methods to optimize exploration and production of the oil-rich shale fields while also integrating that production with their supply chains for midstream and downstream assets. 

It paid off – production had grown to 4 million barrels per day by last year, about one-third of total U.S. production. 

It’s been hard for independent producers to compete, and the resulting flight of capital from the Permian has further weakened independent producers. The combination of COVID-19 and geopolitics might just seal their fate. 

How does this new dynamic in the oil and gas market impact the energy transition, the effort to transform the global energy sector from fossil fuels to zero-carbon energy by 2050, in order to limit climate change?

Simply put, this new dynamic might jeopardize the significant gains made in advancing the energy transition. And this largely derives from the cost of the transition.

Developing a strategy for the deployment of affordable, reliable and sustainable energy – a strategy that can satisfy both the world’s growing demand for energy and concerns about carbon and other climate-damaging emissions – is key to this transition. And there have been plenty of hopeful signs, especially in the U.S. and Western Europe. 

Pressure to de-carbonize energy sources has resulted in a rapid drop in the use of coal over the past five years, especially in the United States. Flaring and venting of natural gas remain significant issues but have increasingly become visible challenges as the true extent of the practices are only now being measured.  And what gets measured, gets monitored!

Wind, solar and other renewable energies have become more affordable and certainly more robust, despite continuing challenges with reliability. Less than a year ago, Bloomberg NEF forecast that solar and wind would provide have the world’s energy by 2050. Things look substantially less rosy today. 

Driven by the coronavirus and pledges by Saudi Arabia and Russia to flood the world market with low-priced oil, the cost of electricity generated from fossil fuels is likely to remain low. The growth of renewable power in the U.S. already has been hurt by the lack of incentives – subsidies for  solar installations have been limited and production tax credits for wind energy will be phased out in 2021 – but low prices for fossil fuels won’t help.  

Those low prices also mean lower gasoline prices – AAA reports the price of a gallon of gasoline dropped six cents between March 9 and March 12. That, combined with a bear market and an overall gloomy economic outlook, isn’t good news for those expecting a rapid expansion of electric vehicles. Why pay a premium for an electric car when it’s suddenly cheaper to fill up your old gas-powered ride? 

Climate concerns – and the social activism around those concerns – aren’t going away. But new regulations to limit fracking or reduce flaring have just become less likely. Talk of government relief for the suddenly beleaguered oil and gas industry will slow the push for renewables that much more. 

Hold on tight. All it might take is one more geopolitical event to reshape our energy future. Those rock-solid certainties of just 10 days ago suddenly seem to have turned to jelly. 

Dr. Ramanan Krishnamoorti is the chief energy officer at the University of Houston. Prior to his current position, Krishnamoorti served as interim vice president for research and technology transfer for UH and the UHSystem. During his tenure at the university, he has served as chair of the UH Cullen College of Engineering’s chemical and biomolecular engineering department, associate dean of research for engineering, professor of chemical and biomolecular engineering with affiliated appointments as professor of petroleum engineering and professor of chemistry. Dr. Krishnamoorti obtained his bachelor’s degree in chemical engineering from the Indian Institute of Technology Madras and doctoral degree in chemical engineering from Princeton University in 1994.

UH Energy is the University of Houston’s hub for energy education, research and technology incubation, working to shape the energy future and forge new business approaches in the energy industry.

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