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Cheap Oil Might Not Be the Worst Thing

In addition to putting the Keystone XL project on pause, oil price fluctuations mean a destabilized, less-powerful oil industry.
​Image: Roy Luck/​Flickr

​Buying gas right now is even more of a guilt-inducing task than it was when it just meant everyday supplication to the overlords of fossil fuel. It's cheap, really cheap—which feels good, because it means we have more money. But buying gas shouldn't feel good; it should be painful. We know the true, devastating costs of that gas.

It's intuitive to think that cheap oil is bad for limiting fossil fuel consumption. With gas below two bucks a gallon, we can easily imagine demand for electric and hybrid cars sinking, along with interest in renewable energies generally. If you were Saudi Arabia and saw the looming green energy future, a reasonable response might be to keep the taps wide open to suppress prices and, thus, suppress fossil fuel alternatives. I would.

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Image: macrotrends.org

Maybe it's not so hopeless. For one thing, the market is more complex than that. Oil prices below $50 a gallon should have the effect of neutralizing the Keystone XL project, which, like fracking at large, exists only when prices are high.

That is, it's not cost-effective to extract tar sands oil, a relatively expensive process, when cheap conventional oil is flooding the market from the Middle East. The output from existing tar sands projects can meanwhile be moved by train, a transportation option with enough capacity to service current production. As Technology Review ​reports, 2014 saw 240,000 barrels of oil being moved per day via rail, while capacity will have increased to 700,000 barrels by 2016. The 20 Alberta oil sands projects currently in development will be safe, but after that, expect oil co.'s to hold off.

That's cool, but it's clearly temporary, right? Oil prices won't be suppressed forever and tar sands drillers will turn fast-zombie in a blink. Or maybe cheap oil doesn't sink renewables, which is the unlikely conclusion of a pair of researchers at the Dutch Research Institute for Transitions, who have calculated a "best" oil price for fostering renewable energy projects. It's neither high nor low, but somewhere in the middle.

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First, look at the case of very high oil prices. We might figure that expensive oil would reduce demand and shift (some) power to renewable energy producers, ultimately hurting oil producers. Not so much: "Oil showed very little elasticity of demand," ​the duo writes at Energy Post. "Consumption was not impacted very much. At the same time, oil firms were amongst the most profitable businesses on the planet, which gave them considerable economic and political influence as well as the means to expand their business." With demand less vulnerable than anticipated, high prices are/were only good for oil companies, is the conclusion. Seems reasonable.

Very low oil prices, as we're seeing now, aren't great either, expectedly stimulating demand. But there's a bright side: Cheap oil means ​destabilization within the industry, which we can imagine setting the stage for energy transition. "Together with fluctuating prices, the tensions over access to fossil energy, geopolitical stresses, the carbon bubble debate, the (resistance to) shale gas developments and the climate negotiations are all putting the heat on fossil fuels," the Dutch researchers explain. "It seems that, combined with the accelerating pace of the spread of renewables, all ingredients are there to create long term instability in the fossil based markets."

This doesn't mean that cheap oil is the ideal so much as heavily fluctuating markets. Renewables have the neat benefit of relative cost transparency, a feature that, in the face of the oil rollercoaster, might draw increased investment as people look for safe, stable hedges. "The best oil price for the energy transition," the report concludes, "is a heavily fluctuating one."