Oil Market Report November, 2015

The 21st United Nations Climate Change Conference (confusingly called COP21 = Conference of Parties to the United Nations) takes place in Paris this December and considering recent events in the French capital, Parisians may be glad to have the world’s attention focused on something other than acts of terror. Over the years, COP meetings have become rather an easy thing to be cynical about, as few have delivered much that is concrete. Where there have been agreements, too often they have only addressed fringe areas of concern or have involved too few signatories to be of significance. In addition, one of the grand ironies of previous COP meetings is that for an event ostensibly aimed at reducing hot-air, plenty of the stuff has normally been generated! Detailed commitments on carbon reduction have been thin on the ground, whilst grand-standing, U-turns, liberal doses of sanctimony and a general vagueness around key technical issues have all been plentiful.

So what of COP21? Well this time around, some form of binding agreement does in fact seem likely. To start with, the “mood music” coming into Paris 2015 is discerningly different from previous years. The world economy looks and feels less fragile than it has been in the recent past and even with China’s economic slow-down (ie, 4-5% GDP growth), that country may be entering a more steady and sustainable period of economic development. And economic good news is environmental good news, because however much the green lobby naively try to persuade us otherwise, the replacement of fossil fuels with renewable forms of energy is going to be expensive.

Despite this fact, the major powers are still slowly moving to a consensus and nowhere more so than in the USA. Firstly we have a country that is experiencing rapid decarbonisation, as coal-fired power stations close down to be replaced by cleaner (fracked) gas alternatives and fuel efficient cars are outselling the giant gas guzzlers of yore. At a political level, the Obama Administration – as it enters the end of its political life – now seems to be fired up with environmental zeal, having historically been timid on green issues. Not only has Obama recently vetoed the controversial Keystone XL pipeline (which would have transported Canada’s oil tar sands into the US Market), but the President has also publicly declared that getting an international agreement in Paris to limit global emissions is one of his top remaining priorities. Where exactly does this new found environmentalism come from? Well possibly it comes from public opinion, highlighted in a recent Yale University survey. This showed that 63% of Americans believe that global warming is real and 59% are worried about that fact. This would indicate that the topic is no longer a minority interest in the USA and is therefore a subject that even the Republicans – when the lunatics have been removed from the Presidential Race – will have to address.

Meanwhile in the energy sector, wherever you look, huge strides in dealing with emissions are being made. In the last 20 years, renewable energy in Europe has increased by circa 3,000% and in the same period, the cost of solar panels and electric power-train (car) batteries have both dropped by circa 60%. Carbon Capture and Storage (CCS) – although still not entirely supported by the Green Lobby – is finally coming into play. Last month in Alberta, Canada, the world’s first oil sands CCS facility was opened at a cost of $1.35bn and by the middle of next year (in conjunction with a second Albertan CCS project), the facility will capture a combined 2.76m tonnes of CO2 each year – equivalent to annual emissions from 400,000 vehicles. And increasingly those vehicles are emitting less anyway; in 2016, it will become mandatory for new trucks and buses in Europe to use “Euro VI” engines This will take fuel efficiency to a whole new level with 20 Euro VI engines (ie, 20 buses or trucks) emitting the same amount of Nitrogen Oxide (NOx – one of the most aggressive greenhouse gases) as one engine did in 1990!

So in terms of getting agreement in Paris, it seems that all the ingredients are in place. After all, it is a lot easier to agree to do something when much of it is happening in the real world anyway. But two monumental question marks remain. Firstly, how much will the Developing Economies (and here we must include China) commit to addressing climate change themselves. In the past, poorer countries have demanded that the West do the most to address climate change, because they have the most money and emit the most. In 2016 the former might still be true, but the latter is increasingly less clear cut. An even greater unknown is how the general public will react; 59% of Americans may be worried about climate change, but what exactly are they willing to do about it? Certainly Portland still sees nothing that says consumers are ready to “go green” if it costs them more and sadly, there is no solution in the short-term that reduces both emissions and costs at the same time.

Dealing with climate change requires a three way accord between Business, Government and the Individual. The first two elements – quite frankly – are simple. Many businesses will oblige by staying ahead of the innovation curve and legislation can be applied to the rest. But assuming that some form of agreement will come out of Paris, then the real work on the “man on the street” will begin. Politicians, academics, community leaders and business will all have to persuade the public that switching away from fossil fuels is a choice worth making. This cannot be done by pretending economic progress is overrated or by misleading people into thinking that switching to renewables is going to save money. In an increasingly self-interested world, getting people to change habitual behaviours will be the biggest challenge of all.