Related Articles
Forward article link
Share PDF with colleagues

Climbing the carbon wall while the oil price collapses

Financing the transition to a low carbon economy is being made even more difficult by the steep decline of low oil prices

The oil price crash has triggered vivid discussions about the eventual emergence of a post-oil era. Some commentators have even suggested the crisis signals the end of oil industry.

Pierre Noel from the International Institute for Strategic Studies argues this, since the crash is occurring while wind and solar are becoming ever-cheaper, storage costs are falling and network management improves. He also notes that renewables are displacing coal and gas even in the US and the adoption of electric vehicles (EVs) will further dampen oil demand.

His assessment reflects the European context particularly, where societies are taking an increasingly negative stance towards the oil industry because of its CO2 footprint. As a result, the region’s financial institutions are tending to switch their investments from oil to carbon-free technologies, often through innovative approaches to green finance.

Recent data published by Wood McKenzie supports this trend. It reveals a constant increase in installed wind and solar capacity since the year 2001, while the oil price has been characterised by volatility over the same period. The use of renewable sources has increased across Europe, where oil products are rarely used for power generation and the price of electricity has uncoupled from the price of oil.

However, the recent oil price decline is unprecedented. It reflects not only an economic slump but a decline in oil demand resulting from the Covid-19 pandemic. With stagnation of the transport sector and small and medium businesses, oil demand has become unpredictable. The unknown duration and the level of disturbance caused by this recent ‘black swan’ event will continue to impact our ability to forecast. The oil price is a reflection of both global economic malaise and political uncertainty.

5pc - share of total tax revenue from oil excise duty in some EU countries

National budgets

The economic shock has put pressure on national budgets—which represents a challenge to the energy transition rather than offering a path to a post-oil era. Decarbonisation policies require massive investment, from the electrification of economic sectors to boosting the share of renewables in the energy mix. The electrification of transport, buildings’ heating systems and various industrial sectors would require a 75pc increase of power generation capacity across the EU by 2050, according to a BloombergNEF report in February. This means more public funds would need to be allocated to power generation, transmission and distribution.

The growing pressure on national budgets means the expected widespread switch from petrol and diesel cars to EVs becomes particularly problematic. Oil importing states receive excise duty on oil products and typically use it to improve road infrastructure.

In large EU economies, such as France and Spain, the share of oil product excise in total national tax revenues can reach 2.5pc. In smaller EU economies, the share is even larger and can account for as much as 5pc. In the context of increasing demands on national budgets to sure up economic activity, many governments would be reluctant to lose this budgetary item.

FIGURE 1: Share of oil product tax revenues in national budgets (2018)


Unleaded petrol


Total pc from tax revenue

















Source: Calculation based on primary data from the European Commission and the OECD


Commercial competition

Low oil prices might also damage the commercial viability of the transport sector, in particular, switching from oil to gas. The oil price crash of 2014-15 caused the growth rate of users switching to natural gas vehicles reduce from 8pc to 3pc, according to European natural and renewable gas association NGVA.

Pressure on national budgets represents a challenge to the energy transition rather than offering a path to a post-oil era

Even before the crisis, in the context of oil price of $50-60/bl, empirical observations of the maritime sector revealed reluctance to abandon cheaper marine oil (with prices discounted from oil) for more expensive LNG. The current oil price further amplifies the impediments for LNG.

At the same time, cheaper natural gas can be a driver for the power sector switching away from coal, leading to a significant decrease of greenhouse gas emissions. However, as gas price dynamics have decoupled from those of oil, this should be discussed separately. 

The difficulties of achieving an energy transition may even be greater outside the EU, which is the world’s least oil-intensive economy.

In China and the US, cheaper oil can become more attractive for both small businesses and industries. Further, the Indian subcontinent includes the world’s most oil-intensive economies (see Fig 2), where oil is also widely used in the residential sector, and the region’s authorities tend to prioritise short-term benefits over long-term sustainability.

FIGURE 2: Oil intensity

Economic area

Oil intensity (t oe/$1,000)









Source: International Energy Agency, 2019


Adding to the pressure on the transition, disruption to Chinese supply chains is creating pressure on the lithium industry, which is pivotal for battery production used for electric vehicles and photovoltaic energy. The disruption risks are expected to last at least the duration of China’s economic slowdown, with the industry’s outlook unclear while fossil fuels remain abundant and cheap.   

The oil price also remains a social metaphor of prosperity beyond the meeting of oil producers and consumers, a concept I set out in Beyond Market Assumptions: Oil Price as a Global Institution. In this context, growth in the oil price is necessary to further stimulate energy transition.

Andrei V Belyi is an adjunct professor in energy law and policy at the University of Eastern Finland and is the owner and a member of the board of Estonian energy consulting firm Balesene

Also in this section
PE Live: European majors pin hopes on Cop26
25 November 2020
Global leaders must come together and agree to a carbon price, transparent reporting and other measures if the Paris targets are to be met
PE Live: Societal attitudes key to energy transition
23 November 2020
Energy companies are increasingly engaged in decarbonisation—but this must be underpinned by behavioural change and action by elected representatives
PE Live: International rivalry a major threat to climate fight
22 November 2020
A scenario where countries jockey for economic advantage would undermine the ability of the world to tackle global warming