The market was supposed to save the planet.
That, at least, was the argument of many economists grappling with the problem of climate change. As fossil fuels became scarcer, they pointed out, the price of oil and natural gas would go up. And then other options, like solar and wind, would become cheaper, particularly as investment flowed into that sector and drove down the cost of new technologies.
And voila: The invisible hand would gradually turn down the global thermostat.
It’s a ridiculous argument. For one, there’s no guarantee that the market would respond in a timely manner (i.e., before we’re under water). For another, oil and gas prices are as volatile and unpredictable as a Q&A session with Donald Trump.
In 2008, for instance, oil hit a high of $145 a barrel. But that didn’t last long. And in 2015, despite all sorts of turmoil in the Middle East and in other oil-producing countries like Nigeria, the price of crude fell between 30 and 40 percent to its lowest levels in 11 years. That’s a bigger drop than the commodity price declines for metals, grains, and soybeans. Gas stations around the United States didn’t fully reflect this drop, but petrol prices still fell to an average of $2.40 a gallon, saving each driver more than $500 last year.
There are a number of reasons for the price drop, but it boils down to supply (more of it) and demand (less of it). The United States boosted oil production by 66 percent over the last five years, making it the largest oil and natural gas producer in the world in 2015. Other producers, like Saudi Arabia, also didn’t scale back, in part to stick it to a sanctions-hobbled Iran and snatch up its clients. Meanwhile, greater fuel efficiency and slower economic growth around the world (particularly in China) have reduced demand.
The nosedive in oil prices has been good news for a lot of people and a lot of countries. But it’s not good news for the planet.
First the Good News
Consumers love lower energy prices. It’s not only cheaper to fill up the tank and heat the house. Your shopping bill is also smaller because of lower manufacturing and transportation costs. Airlines cut fares (or at least they should). And it’s a big boost for the global economy. As The Economist notes, “a price fall normally boosts GDP by shifting resources from producers to consumers, who are more likely to spend their gains than wealthy sheikhdoms.”
The other good news is that lower oil prices haven’t undercut the market for sustainable energy. In the past, cheaper fossil fuels have meant that governments and industry put off the hard decision to shift to renewable energy sources. But several factors have changed this calculus.
The international community has made a commitment, most recently in Paris, to invest in wind turbines and solar panels. Because of technological advances and government incentives, meanwhile, the cost of renewables has fallen. The price of solar panels in the United States, for instance, has dropped 70 percent since 2009, and industry observers expect even sharper cuts in the years ahead. To keep up the momentum, the Obama administration pushed through an extension until 2019 of its tax credits encouraging renewable energy. And the investment banks, usually risk averse on this issue, are finally betting big on the sector: Goldman Sachs, for instance, announced in November that it will increase investments in renewable energy by fourfold.