Low Oil Prices and Climate Change Michael Levi

Low Oil Prices and Climate Change Michael Levi

Bottom Lines n Future oil prices are a massive unknown – Level – Volatility n Transportation and electricity are fundamentally different – Transportation is more directly affected – Both are exposed n Essential to consider market and policy channels – Impact on policy can be as important as on markets – Policy consequences could run opposite to expectations Council on Foreign Relations Michael Levi March 7, 2021

OIL PRICES Council on Foreign Relations Michael Levi March 7, 2021

Oil prices have plunged… 160 Brent Crude Price (2015 dollars) 140 120 100 80 60 40 20 0 1995 2000 2005 2010 2015 Source: EIA Council on Foreign Relations Michael Levi March 7, 2021

…and the future is murky West Texas Intermediate Crude Oil Price (Dollars per barrel) Source: EIA Council on Foreign Relations Michael Levi March 7, 2021

Volatility has risen too Brent Crude Volatility Crude Oil Implied Volatility (OVX) 100% 70 90% 60 80% 50 70% Points 60% 50% 40 30 30% 20 20% 10 10% 3 l-1 3 Se p 1 N 3 ov -1 3 Ja n 1 M 4 ar -1 M 4 ay -1 4 Ju l-1 4 Se p 1 N 4 ov -1 4 Ja n 1 M 5 ar -1 5 Ju -1 3 ay -1 2011 M 2006 ar 2001 M 1996 n- 1991 13 0 0% Ja Percent of real oil price Trailing 1 -year standard deviation of monthly Brent crude price Source: Chicago Board Options Exchange Source: EIA, FRED Council on Foreign Relations Michael Levi March 7, 2021

TRANSPORTATION Council on Foreign Relations Michael Levi March 7, 2021

No meaningful VMT trend yet Source: U. S. FHWA Council on Foreign Relations Michael Levi March 7, 2021

Fleet mix shifting for many reasons 60% 58% 56% 54% 52% Cars 50% Light Trucks 48% 46% 44% 42% 40% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: FRED Council on Foreign Relations Michael Levi March 7, 2021 2014 2015

35, 000 30, 000 25, 000 20, 000 15, 000 10, 000 5, 000 14 20 13 20 12 20 11 20 10 20 09 20 08 20 07 20 06 20 05 20 04 20 03 20 02 20 01 20 00 0 20 U. S. Ethanol Production (Million barrels) Impact on alternatives depends on a mix of price and policy Source: EIA Council on Foreign Relations Michael Levi March 7, 2021

A few international notes n All countries face variations on these fuel economy politics – Though some are driven more by environmental concerns n Low price has smaller emissions impact when taxes are high – Europe – Japan n Low price has created room for consumption-reducing fuel subsidy reforms – India – Indonesia Council on Foreign Relations Michael Levi March 7, 2021

ELECTRICITY Council on Foreign Relations Michael Levi March 7, 2021

World Solar Energy Index 700 600 Points 500 400 300 200 100 0 2011 2012 2013 2014 2015 Source: Bloomberg L. P. Council on Foreign Relations Michael Levi March 7, 2021

ISE Global Wind Energy Index (GWEI) 100 90 80 Points 70 60 50 40 30 20 10 0 2011 2012 2013 2014 2015 Source: Bloomberg L. P. Council on Foreign Relations Michael Levi March 7, 2021

U. S. electricity is not exposed… 1. 1% 0. 7% 0. 4% 0. 3% 0. 4% 4. 5% 0. 5% 6. 2% 38. 9% 19. 5% 27. 5% Coal Natural gas Nuclear Hydro & Pumped Storage Wind Wood Petroleum Waste Solar Geothermal Other Source: EIA Council on Foreign Relations Michael Levi March 7, 2021

…except through natural gas 1, 800 1, 600 1, 400 1, 200 1, 000 Oil 800 Gas 600 400 20 14 20 11 20 08 20 05 20 02 19 99 19 96 19 93 19 90 19 87 0 Source: Baker Hughes Council on Foreign Relations Michael Levi March 7, 2021

Oil sometimes matters directly… Source: Citi Council on Foreign Relations Michael Levi March 7, 2021

…but the indirect impact is bigger $ 20. 00 $ 18. 00 $ 16. 00 $ 14. 00 $ 12. 00 $ 10. 00 Japan LNG $ 8. 00 Europe: NBP (UK) $ 6. 00 US: Henry Hub $ 4. 00 $ 2. 00 01 M ay 4 20 1 Ju ne 4 20 Ju 14 ly 2 A ug 014 u Se pt st 2 em 01 be 4 r O ct 201 ob 4 N ov er 2 em 01 4 D ber ec em 201 be 4 Ja r 20 nu 14 ar Fe y 2 br 0 ua 15 ry M 201 ar ch 5 20 15 il 2 pr A M ar ch 20 14 $- Source: Bloomberg L. P. , Japan Ministry of Economy, Trade, and Industry , EIA Council on Foreign Relations Michael Levi March 7, 2021

Policy is again central n. Policymakers readily conflate oil, renewables, and climate n. Natural gas prices and volumes, and renewables costs, can drive appetite for emissions-reducing regulation n. Smart policy will accept uncertainty and preserve emissions-cutting options Council on Foreign Relations Michael Levi March 7, 2021