Why lower oil prices hold the key to renewable energy

Renewable energy would be the real winner in a world of cheap, stable fossil fuels, which no longer need massive subsidies.

Crude-oil prices have remained high and volatile over the last decade, rising by nearly five times since the turn of the century. This speculation-induced volatility (see “How oil became volatile”) and surging prices have been particularly high in Brent futures – bets on the future price of North Sea oil – since 2005. Though global consumption of oil has risen only marginally since then, by less than 1% per year on average, the price of Brent crude has jumped threefold.

Analysts including Forbes writer Robert Lenzner estimate that nearly a quarter of the price of a barrel of oil is the result of speculation. That works out at around US$23.39 per barrel. With 88 million barrels consumed every 24 hours, speculation is costing a whopping US$2 billion plus each day. Even if half the speculation could be whittled down, there would be an annual net saving of around US$400 billion of taxpayers’ money across the globe.

Read more: How speculators manipulated the oil market
Also: Can China the US bring oil prices under control?

Lower energy prices would enable politicians around the world to remove the US$400 billion in subsidies currently given to the fossil-fuel industry each year. Part of this sum could then be reallocated to renewable-energy producers.

Fossil fuels hijack renewable subsidies

The struggle to hog energy subsidies began nearly 50 years ago, when the powerful fossil-fuel lobby hijacked the energy subsidy platform with the concept of carbon trading, an ingenious incentive to carbon emitters. In 1966, Thomas Crocker, a novice student of economics from Wisconsin with no industrial experience, was asked to research and collect data on pollution emanating from Florida’s fertiliser plants for a conference in Washington DC. In absence of data, Crocker suggested a unique strategy of penalising carbon producers with a trading option later known as cap-and-trade.

The fossil-fuel lobby quickly converted this into an incentive scheme for energy producers, where energy traders could sell allotted carbon credits and make a killing if they produced less carbon than an amount they had previously agreed. There was no independent benchmarking to assess whether the figures they agreed were optimum and would really reduce the global atmospheric carbon content in the future.

The Kyoto Treaty of 1997, signed by the world’s major energy consumers barring the United States, heralded an era of carbon trading, in which Europe’s energy producers made millions by selling carbon credits and jacking up energy prices in the name of reducing pollution. It made the energy user pay for pollution while handing incentives to the carbon emitter, who was increasingly lax in curbing emissions in the absence of third-party audited verifications of data. Power plant layouts and complex multipoint verifications make it literally impossible to assess the authenticity of emission data that is too complex to control and too easy to rig.

While Wall Street banks and carbon producers made money trading carbon credits and the EU spent billions of taxpayer funds subsidising polluters, emissions kept on rising both inside and outside Europe. Months before the Copenhagen conference of 2009, when high emission data and carbon-credit frauds started tumbling out of the closet, Crocker – the father of cap-and-trade – admitted it was a faulty concept and one incapable of reducing global emissions in an interview with the Wall Street Journal. However five decades of cap-and-trade theory ruling the roost had passed and billions already had been spent subsidising the carbon emitter instead of directly supporting the producers of renewable energy.

The Wall Street influence

Technologists who understood the mechanics of energy and carbon control were relegated to the background as economists and bankers took control of global climate-change strategy. They converted climate change into an exercise of esoteric fund management. And they devised obscure and complex documentation that triggered over 15 years of political wrangling under the United Nations-led climate-change negotiations.

As long as Wall Street banks and associated economists continue to influence the political decision–makers, they will add an element of trade or mortgage to every aspect of the energy industry in the pursuit of profit. They do not understand the renewable-energy industry – its growth, the way it operates – or the complexities of managing modern energy plants and integrating them with the renewables sector. Political leaders, often ignorant, pliable or both, are too troubled by managing their own economies to push forward a radical transformation that brings technologists to the fore in issues of sustainable development.

The world needs simple but quick solutions to solve the climate-change problem. If the most important element is getting the right people to do the job, the second most important is choosing the right technologies, ones that are worth the money and minimise the burden on taxpayers. Wind power, solar power and electric vehicles are just three options that need be pursued to get the best bang for buck. The consumer will always have a tendency to choose the cheapest energy options and so only technologies capable of mounting a serious challenge to fossil fuels should be pursued, and those single-mindedly.

More direct spending on renewables

Offshore wind-power stations in Germany have already brought down the price of generation to below that of fossil fuels, though generation problems exist because wind power is a fluctuating source. European smart-grid architecture is expected in the near future to answer some of today’s problems around wind and solar power by integrating diverse sources into a common stable grid. Electric two-wheelers, or e-bikes, already pose a serious challenge to fossil-fuelled counterparts, especially in China where over 200 million commuters use electric bikes and scooters on a daily basis.

Nations need to invest in renewable energy technologies that deliver, just as they need to invest in roads, bridges, mining and space and defence technologies. Not all projects will give a high return on investment and there will be some dry wells and false starts along the way, just as with oil drilling, space programmes or missile shields. Advances in solar and wind technology in Spain and Germany, China and India, show that the United States may not be the dominant player in the renewable-energy industry in the future.

Leaders who think ahead and take the calculated risk to invest in the right areas can pull off astounding results in renewable energy. The eurozone debt crisis will prove a dampener in the process no doubt, but if fossil-fuel prices can be tempered and subsidies re-directed, there will be no stopping renewable energy.