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Why profitable oil companies are vital for the green energy revolution

It may seem counterintuitive, but the conventional wisdom in the environmental world is that profitable oil, gas and coal majors are good for decarbonisation - boosting R&D funding, and improving market take-up of new technologies. It may indeed be that decarbonisation, at least to the level required to meet internationally recognised targets, is not possible without profitable oil majors. 

This is because high oil, LNG, or coal prices, and thus high profit margins for companies, pushes up the prices of fossil fuel intensive activities - like generating electricity or driving a petrol or diesel car, or even making plastic. These higher prices make renewables more cost attractive for adoption, infrastructure building, and research, as their relative cost to traditional fuels falls. 

Of course, the theoretical problem with this model is that the widespread adoption of renewables and non-oil based technologies will mean a collapse in oil demand. This collapse in demand will, in turn, lead to a flood of cheap fossil fuels - once more making it difficult to justify the capital expenditure needed to build the wind turbines or solar panels required to replace a coal or LNG power station, or ripping out and fitting significantly more expensive engines or generators in industry. 

The impact of a crash in demand has already been seen, several times in recent years. During the global recession in 2008, demand for oil plummeted - leading to huge cuts in prices and profit warnings across the industry. This year, as the COVID-19 crisis hit and associated lockdowns crippled industrial demand for oil, prices went negative for the first time in history. 

Yet all of these impacts have been on the demand side. OPEC, the global cartel that dictates the amount of oil extracted from the world's largest fields, carefully regulates oil supply. Usually a core goal is to maintain stable prices, roughly in line with demand. The organisation is aggressively efficient by design and, where it cannot stop sudden demand shocks from impacting prices, under normal circumstances it rarely takes long for the leaders to agree production cuts when necessary. In this scenario, OPEC is a friend of green politicians - ensuring that falling demand should not cause an influx of cheap oil as countries and companies make wholesale switches to environmentally friendly energy sources. 

One current exception comes when political crises interfere. At the start of this year, a crash in demand coincided with an OPEC - Russia price war that saw oil extraction expand significantly. The sole purpose was to increase oversupply until one side cracked and agreed to new quotas. In the end both sides backed down, but there is always a political risk to OPEC's careful management. This political risk will grow as conditions change, and oil brings less power to major players. 

It is today commonplace that some OPEC countries continue to over-produce oil beyond their agreement for the sake of individual profit, and it is generally even more common when members are asked to make significant cuts to supply. There is no guarantee that OPEC will be able to maintain high oil prices as decarbonisation starts to put pressure on the organisation. Indeed, it seems unlikely that agreements that left production at a small fraction of current levels would be effective while the kind of political pressure that may bring could threaten OPEC's future. 

International regulation seems to be the only stable solution to this conundrum. Coordinated global action can keep the oil price high, regardless of demand. Yet, given the complexity of such a task, it would have to be carefully planned.  

The kind of government intervention that consumers are used to pushes prices up. Through taxing fuels, this is starting to help drive an electric and hybrid car revolution. This is not realistic on a global scale. Realistically, this international action will also need to be more direct and cover more jurisdictions than emissions trading schemes are able to. Rather the only foreseeable way to maintain high prices would be to implement global restrictions and limits on the extraction of fossil fuels, and create a clear framework for enforcement. 

Major supply side intervention of the type required is virtually unheard of. This would break new ground, but given the scale of the challenge we will face over the coming decade it will be necessary - and create even higher margins for mining and drilling companies. Ironically, what's good for the fossil fuels industry's biggest players will also be good for green tech. 

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