The Implications Of 50 Dollar A Barrel Oil For The World Energy Mix

Oil prices keepsliding, sending economic shockwaves around theworld. Analysts are scrambling to try and understand what it meansfor the world's future energy mix and efforts to cut emissions. Butthe relationship between oil prices and energy investments iscomplex. Much depends on how low the price goes as, beyond a certainpoint, lots of projects are no longer economically viable. We take a look at what may happen to the oil price, what itmeans for the industry, and how it could affect the world's effortsto move towards a zero-carbon energy system. OIL PRICES Over the past year, oil prices have gone from a high of about115 to a current low ofabout 50 a barrel, far below many analysts' originalexpectations. Those same analysts are now busy revising their projections.While most seem to think the oil price has hit or is nearing rockbottom, there's a wide range of projections for where it mayrebound to in 2015. This chart shows just how varied those predictions are. They'renot all like for like - some are estimates of a low point, some areaverage price projections for the next twelve months, orpredictions for particular financial quarters - but they do give anidea of the spread of projections: "Source: Data collated and graphed by Carbon Brief." As you can see, hardly any analysts expect the oil price to dipbelow current levels. Most expect the price to recover to somewherearound 70 a barrel by the end of the year. The projections have major implications as companies use them todecide if current and future oil projects are profitable. If theprice of oil drops below a particular point, companies may decideto abandon or scale back their activities. BREAKEVEN PRICES Companies' investments are vulnerable to volatile oil prices, sothey stress-test their projects by working out how much a barrel ofoil needs to cost for them to remain profitable. The referencepoint for whether companies persevere with the projects is known asthe "breakeven price". A range of analyses suggest the majority of the world's oilprojects struggle to break even with the oil price hovering aroundthe 50 mark. Citigroup has collated the breakeven price of all the oilprojects in the world. As you can see from this chart, mostprojects need the oil price to be much higher than 50 perbarrel: Source: Citigroup Carbon Tracker, a thinktank focusing on the financial risksfacing fossil fuel companies, separately focuses in on thedifferent types of projects. It calculates that almost 10 trillion of company investmentsare potentially at risk if the oil price is below 60. Arctic oilexploration projects potentially worth 2.8 trillion in capitalexpenditure have a breakeven price of at least 100, itestimates. Source: Carbon Tracker. Shale oil projects and drilling activities in tar sands, such asthose in Alberta, Canada, which the controversial Keystone XLpipeline would link to, are slightly more robust. Nonetheless,companies investing in such activities risk losing 1.2 trillionand 2.3 trillion, respectively, if the oil price is below 60.Last October, analysis from the Wall Street Journal suggested none of the US's largest shaleformations can operate at the current price of 50 per barrel. The breakeven price for different countries' industries alsovaries, as the chart below shows. The size of the bubble and itsposition on the vertical axis shows how much oil each countryproduces each day. Its position on the horizontal axis shows thebreakeven point for its industry. Sources: Data from the WallStreet Journal. US shale industry data from the US Energy InformationAdministration. Graph by Carbon Brief. As you can see, some countries, above all Libya, are unlikely tobe able to compete with the oil price at its current level. Thatwould seem to include Saudi Arabia's industry, which has abreakeven price of around 100. Only Norway's industry, with abreakeven price of about 50, can remain competitive at currentprices, according to WSJ's data. So why won't OPEC, the influential group of oil-producingstates, act to cut supply and help the price rebound? Saudi Arabia, the de-facto head of OPEC, says one reason it'snot acting to bolster the oil price is to squeeze its shale-based competitors. The country has a 700billion financial reserve, so can afford the hit its economy iscurrently taking due to a low oil price. That's not the case forany of the other countries that need a similar breakeven price:Russia, Iraq, and the US's shale oil industry. WHAT IT MEANS FOR DECARBONISATION OPEC's decision may have a big impact on the world's energy mix.While oil is only a marginal part of most developed countries' energy mixes, gasprices are still linked to the cost of oil in many parts of theworld. That has a knock-on effect on how much investors are willingto spend on low-carbon projects. Many suppliers operating in some of the world's largest oilproducing states still work based on contracts that link the twofuels' prices, though this is becoming rarer. Nonetheless, about 65per cent of Europe's gas is still sold on contracts linked to oilprice, Reuters estimates. Unlike oil, gas is still a major part of most countries'electricity mix. As gas gets cheaper, it potentially becomes harderfor renewables to compete. Energy Intelligence, a consultancy, has modelled the breakevenprice for renewables compared to the oil price. It finds that mostrenewable technologies shouldn't be too affected by a lowprice. As you can see from this chart, renewable technologies in mostparts of the world should still be competitive with an oil price ofaround 50 - only those where the bar goes to the right of the redline may struggle: Source: Data from Energy Intelligence. Graph by Carbon Brief. But renewables are more vulnerable to a fallinggas price. No renewable technologies can directly compete with thecurrent gas price of about3 per million British thermal units (mmBtu),according to Energy Intelligence's data. Offshore wind is the mostvulnerable, with an average breakeven price of about13: Source: Data from Energy Intelligence. Graph by Carbon Brief. But the falling oil and gas prices are unlikely to affectinvestment in renewable energy in the long term as the industrycontinues to be bolstered by government subsidies and support,Energy Intelligence argues. The industry is also well establishedenough in many parts of the world to be able to see out ashort-term price drop. "These technologies are no longer fragileinfants", it says. The oil price may rebound soon anyway, bringing gas prices withit. If the Saudi's plan to squeeze production in other countriesworks, supply rates may drop, and the price may rise again. Thatcertainly seems to be what most analysts expect to happen. So renewable power sources are unlikely to be greatly affectedby falling oil and gas prices in the long term. In contrast, thedata suggests that the majority of the world's oil projects,particularly costly new exploration in the Arctic, are mostthreatened by oil priced at 50 a barrel. Updated 09/12/15, 12.45: The graph showing breakeven costsfor different types of oil projects was changed.