How surging oil prices threaten world’s climate goals

News: Oil prices globally have seen a massive surge due to reduced supply and increased demand due to economies rebounding from the effects of the COVID-19 pandemic. The geopolitical tensions in Russia-Ukraine are also helping the price surge. 

What are the implications of the price rise? 

Economic aspect: Companies may be tempted to invest in oil and gas extraction. However, this will not be profitable in the long term as oil demand will slow down as governments around the globe have climate commitments and are planning to increase reliance on electric vehicles.  

This may lead to oversupply and stranded assets, and Shareholders could face catastrophic levels of value destruction as prices fall.  

Environmental aspect: Not only this investment is unsound economically but has obvious negative implications for the environment. Around 53% of the 34.81 gigatonnes of carbon dioxide emitted from the burning of fossil fuels in 2020 came from oil and natural gas. 

This is specially important as wealthy countries have not made commitments to limit oil and gas production. Major producers like the United States, Canada and Norway have aggressive production plans in place for the next few years. 

Impact on India: As India imports 86% of its crude oil and 55% of gas. It is thus heavily exposed to global fluctuations in the oil markets.  

What is the way forward? 

Oil and gas industry is well aware of the energy transition underway— from fossil fuels to zero- carbon renewables and electrification. So to effectively manage this transition, they must resist the temptation to invest heavily on short-term price signals

Failure to acknowledge these change involves the risk of wasting huge amounts of capital, delivering sub-par returns to investors and locking-in emissions that will make the world miss Paris goals. 

Source: This post is based on the article “How surging oil prices threaten world’s climate goals” published in Down to Earth on 31st Jan 2022.