Clean energy can become Big Oil’s best investment

For years, major oil company CEOs and climate change activists alike have claimed they want oil corporations to make far larger investments in zero-carbon alternatives to oil. Now, with the collapse in oil demand and price, we have the perfect conditions to test whether each really means it.

Global oil prices of $20 to $25 a barrel (West Texas Intermediate) are making most U.S. domestic oil production uncompetitive right now, as American production has nearly ground to a halt. Due to higher production costs than global competitors, much U.S. oil will remain uneconomic even if prices rise to $30 or more.

The lack of profitable investments in pumping more oil alone means some clean energy technologies will have higher rates of return even now, as oil companies sit on billions they were going to invest in additional petroleum production. Longer-term, the outlook for U.S. oil investments may be even worse. Some analysts and company executives believe oil demand will be permanently lower post-COVID crisis. Structural trends like increased telework, reduced commuting and oil alternatives may be cutting global oil demand long-term.

Shell Oil CEO Ben van Beurden expects the oil business will be “altered for some time to come whether because of economic bandwidth that people will have or businesses will have, or whether it is because of attitudes. We do not expect a recovery of oil prices or demand for our products in the medium term,” he said recently.

Many workers, managers, students and others now realize that much work can be done remotely, and that long, expensive, and stressful daily commutes are not in anyone’s interest. Indeed, the economic and opportunity costs alone of commuting are about $6,500 per American worker. And this figure does not count detrimental impacts on health, air pollution and climate change.

Oil demand will also fall in coming years as electric vehicles and other oil substitutes are more widely deployed. Many nations, including in the EU, UK, and China, have adopted regulations to phase out oil-based cars altogether in the coming decades. These countries and many others will also increasingly dampen long-term oil demand through carbon prices. For all these reasons, global oil demand may never again reach the pre-Corona levels for any sustained period.

On the supply side, lower-cost producing petro-states like Saudi Arabia, Russia, Iran, Iraq, and Venezuela remain dependent on oil revenue. They will have to keep producing, flooding markets with lower-priced crude.

The Trump administration response to the oil price collapse has been a series futile efforts to prop up global prices — and floating schemes like paying U.S. producers not to pump oil. To their credit, the industry has rejected most of these approaches as both unworkable and likely to cause resentment among struggling consumers.

The Federal Reserve recently expanded its “Main Street” loan program to now help companies with as many 15,000 employees, and increased maximum loans to $200 million. These moves are intended to prevent bankruptcies by “medium-sized” oil firms like Occidental Petroleum, although the new terms extend to all U.S. companies. Yet it is also painfully clear that the oil industry will suffer consolidation with many smaller oil producers simply going out of business. 

But these measures are temporary expedients at best, since they don’t address the long-term weakness of U.S. oil competitiveness, or grapple with the need to cut carbon emissions from transportation. Today, 95 percent of transportation is fueled by oil and associated products around the world. In the U.S., transportation passed electricity generation last year as the largest source of carbon dioxide emissions.

In the near-term, low oil prices increase the need for subsidies for alternatives so that low-emissions technologies like electric vehicles and advanced biofuels can compete on price to help countries limit greenhouse gas emissions and air pollution.

This would be a logical time to enact policies to help increase investment by major U.S. oil companies and others capital-rich sectors in oil alternatives.

Already oil majors are making investments in advanced biofuels, fuel cells, carbon capture and storage, direct air carbon capture, carbon-based products, electricity storage technology, and many others. But only a little more than one percent of all major oil company investments globally go to clean energy, with even slightly lower levels for U.S. companies, despite industry television advertising that relentlessly promotes their small green expenditures.

Technology-neutral zero-carbon technology investment tax credits are gaining widespread support even among Republicans and could spur oil company investments. These should be included in economic stimulus legislation, along with more robust tax incentives for consumer purchases of electric vehicles. Clean infrastructure legislation should include elements like EV charging stations and advanced electricity.

Government procurement of electric cars, trucks and buses and other clean energy products can speed the transition. Oil production subsidies in the U.S should be ended as should oil consumption and production subsidies around the world. Cash incentives to retire older oil-based “clunkers” can turn over auto fleets more quickly while matching incentives for EV purchases can stimulate a much-need auto industry job and production resurgence.

Eventually establishing a U.S. carbon tax when the economy recovers will be necessary. It is notable that almost all oil majors support significant carbon taxes.

But for now, climate activists and economists both should advocate for clean incentives and welcome oil industry investments in alternatives.

The oil majors have the massive investment capital needed to rapidly reduce the costs of many low-carbon technologies through economies of scale. Wind and solar prices have fallen more than 80 percent in the last decade due to domestic and global incentives. Similar cost reductions can happen in the transportation sector with enough investment.

Since its discovery in Pennsylvania shortly before the Civil War, oil has provided remarkable economic value to America. And even with adoption of clean incentives, oil will be an important part of our economy for many years to come. 

But as America has become one of the world’s largest oil producers, the U.S. has simply exchanged one historic weakness — its former deep dependence on oil imports — for another: its reliance on high oil prices to support domestic oil production. America is therefore still immensely vulnerable to wild swings in foreign oil output, prices and demand, as the latest crash has so vividly demonstrated.

Most importantly, the negative externalities of oil — especially climate change, corrupting geopolitics, and damage to health — have become increasingly unsustainable.

The current oil price collapse may be the biggest opportunity yet for America to start phasing down our dependency on oil. It’s time for policymakers, climate activists and oil companies to work together to make the transition to clean alternatives that will be less costly to our climate, our health, and our economy.

Paul Bledsoe is president of Bledsoe & Associates, a policy and communications consultancy, and lecturer at American University’s Center for Environmental Policy. He served as staff member in the U.S. House, Senate Finance Committee, Interior Department and on President Bill Clinton’s White House Climate Change Task Force.