EPIC: We ended 2015 with a landmark climate accord in Paris. Coming out of that agreement, what are the next steps for nations, and how can we measure success?
Ogden: The Paris agreement was a monumental achievement, but by no means does it put us on an easy glide path to a stable climate. Rather, to realize its potential, countries now have to start living up to the terms of the agreement and how, with the spotlight of Paris gone, they can keep this issue a top priority. For 2016, this means countries need to be taking clear steps to meet their respective national greenhouse gas pollution reduction targets, to mobilize more public and private international finance to help developing countries in need meet the climate challenge, and to deliver on other Paris and non-Paris climate commitments as well. There is more work to be done directly through the same body — the UN Framework Convention on Climate Change (UNFCCC) — that delivered the Paris agreement, too. For instance, the new transparency framework that was adopted in Paris, which will provide clarity on countries’ mitigation and adaptation actions, is of great importance and the UNFCCC will need to advance and drive its implementation at its next conference in Morocco in early November 2016.
But we will have signs earlier than that about whether or not countries will succeed in keeping climate change front and center post-Paris, with the G7 meeting that Japan is hosting in May being an early opportunity to do just that. Last year, for instance, the G7 leaders developed a common understanding of what an acceptable long-term global climate goal would be – an understanding that effectively set up such a goal for inclusion in the ultimate Paris agreement. The G7 also launched a major new global effort on expanding access to climate-related risk insurance in developing countries. Will this year’s G-7 be similarly successful in its climate outcomes?
Another important event will be the G20 in September, hosted by China. Over the past few years, the US-China climate relationship has matured significantly and become a centerpiece of the international climate architecture, and it was at the 2014 G20 that President Obama and President Xi stood side by side to announce their respective national greenhouse gas reduction targets. This G20 will be President Obama’s last chance to drive the climate agenda directly with his Chinese counterpart – I would be surprised if they don’t find a way to mark this with some positive climate outcomes.
EPIC: The other major story from 2015 was oil prices. Prices repeatedly hit record lows, and began impacting the world’s leading energy companies. Will these low prices continue in 2016?
Ori: Well, if anything the route in prices has only gotten worse in 2016 with global benchmark oil prices dipping below $30 per barrel for a period in January. That’s the lowest prices have been since early 2004, which in oil market terms was almost a different era. Now, low prices will eventually bring the market into balance. Demand in 2015 was up sharply in almost every region of the world, including the United States and China. And a massive amount of investment in future global oil supply has been wiped out. In fact, global upstream investment will have declined for two consecutive years in 2015 and 2016 for the first time since the early 1980s. This will really start to have an impact in 2018, 2019, and 2020. But for now, there is a lot of supply overhang.
One key thing to watch is the pace of adjustment in the United States. Shale has thus far been much more resilient than people expected. Though rig counts in the key shale plays are down by nearly 70 percent, production is only down by 5 or 6 percent from its peak. That is set to change soon, but maybe not enough to result in dramatically higher oil prices in the very short term. The fact is that a lot of shale can be developed with oil at $50 per barrel, and the industry is continuously getting better. Another thing to watch is Iran. Now that sanctions have been lifted, Iran plans to immediately begin marketing an additional 500,000 barrels per day of its oil, and up to an additional 1 million barrels per day by year end. That could effectively offset much of the decline from the United States.
In fact, that is effectively what current market forecasts anticipate. Most observers expect global oil supply to exceed demand by an average of 1 million barrels per day in 2016 before the market comes into balance in 2017. I think that is right. And remember, even when the market is balanced, we will still have to dig out from a lot of excess inventory. In the U.S. alone, we probably have a little more than 100 million extra barrels hanging around. Short of a major geopolitical disruption—which is increasingly easy to imagine—or a change in OPEC strategy, it is hard to seeprices recovering before the end of 2017.
EPIC: How will low oil prices affect progress in addressing climate change?
Ogden: In the United States, an area to watch is what impact low oil prices will have on vehicle sales and use. With the national average gasoline price at $1.85 per gallon right now, cheaper gas will affect consumer decisions about the cars they buy and how often they drive them. Electric vehicles face the biggest challenge in this respect. But our national fuel efficiency standards will, regardless of oil prices, continue to push our overall vehicle fleet toward greater efficiency (and reduced greenhouse gas pollution). And EV technology and batteries are steadily improving, while supporting infrastructure is also growing.
In countries where oil is still used in the power sector and cheaper oil could lead to increased demand, it’s important also to remember that the incentives for countries to move away from oil and toward alternatives goes beyond simply price consideration – there are broader environmental, public health, energy security, and climate drivers as well. China, for instance, has set a price floor of $40 per barrel for its refiners – if oil drops below that price, they will pay the difference into a fund dedicated to energy conservation and pollution control efforts.
Interestingly, low oil prices are also resulting in some very climate beneficial policy reforms around the world: the slashing of fossil fuel subsidies. For the past few years, when oil prices were high, countries spent over half a trillion dollars each year on fossil fuel consumption and production subsidies. For oil importing countries, these low prices provided an opportunity to scale back subsidies and spare their national budgets the enormous expense; for oil exporting countries, low oil prices have left gaping holes in their revenues and they can no longer afford to sell deeply discounted products at home. If these reforms can stick, this period of low oil prices would actually leave an important climate legacy.
EPIC: With oil prices low and countries pressured to address climate change, there is going to be a real need for cost reduction in cleaner energy sources. What progress has been made to move the needle forward?
Ori: Well, it is a challenging outlook in transportation with fuel prices as low as they are—as Pete indicates. In the United States, electric vehicle sales actually declined in 2015 compared to 2014, and overall fuel efficiency stagnated as Americans shifted back to buying SUVs and pick-ups in record numbers. The EPA will be kicking off its Midterm Evaluation of passenger vehicle efficiency standards this year, and I expect that to be somewhat of a battle in this new price environment. So there is no doubt that something significant needs to change in transportation if we are going to see meaningful reductions in oil consumption and greenhouse gas emissions.
I am excited about a few things happening right now.
First, lithium-ion battery costs continue to fall and performance is getting batter. When I first started working in energy, these batteries cost $1,000 per kilowatt hour or more. They are now down to probably $350 per kilowatt hour for most market leaders. News stories from last year suggested that GM may be sourcing the batteries for its next generation of electric vehicles for less than half that cost. This is important for a number of applications, but I think it is especially exciting in transportation. By the end of this year, GM plans to introduce the Chevy Bolt, an all-electric sedan with an estimated range of more than 200 miles – double the range of current mid-market electric vehicles. Critically, GM plans to retail the Bolt for $37,500, which falls to $30,000 after the federal tax credit. Yes, this is still expensive, and yes 200 miles of range is slightly less than gasoline vehicles. But the progress in this technology is somewhat astonishing—a doubling of range in just five years. Eventually, automakers will be able to direct those technology improvements into much bigger cost savings, and that will be a game changer.
Second, autonomy (self-driving cars) is coming much faster than many people expected. GM has made a $500 million investment in Lyft to explore creating a network of on-demand autonomous vehicles, there continue to be rumors about a possible partnership between Ford and Google, Apple is rumored to be working its own version of an autonomous electric vehicle, and the Department of Transportation just announced an initiative to begin drafting rules for autonomous vehicle use on U.S. roads. (The federal government is also requesting $4 billion to jumpstart a program designed to accelerate the deployment of autonomous vehicles, but that is far from guaranteed to happen.) There are many reasons why this progress is exciting, but what impact will it have on energy consumption and greenhouse gas emissions? Here, the outcome is still very unclear, in my view. Autonomy might result in people being willing to consume many more miles than they do today. After all, why sit on a crowded subway train to avoid traffic if you can just sit in a car driving itself and do your work or read the paper? This could result in increased emissions. On the other hand, you might be much more willing to sit in a hybrid for those trips since you aren’t driving. This is an area that I think is ripe for all kinds of research. Folks interested in this topic should come to our seminar with Larry Burns in February.
EPIC: With an election year upon us, President Obama has very little time to tie up loose ends and secure his climate legacy. What actions can we expect him to take as he finishes off his term?
Ogden: I think that you will see the Obama administration continue to drive forward both domestically and internationally to build on all of their progress to date and get as much done as they can in the time remaining. Domestically, job number one will be keeping the Clean Power Plan on track – which means withstanding legal and political challenges, and pushing forward with the initial stages of implementation.
In terms of new opportunities for action, one area that is being very closely watched is if and how the EPA starts to move forward with establishing regulations for existing sources of methane pollution, which accounts for about 10 percent of greenhouse gas emissions in the US. The administrations has already set a national methane reduction target, and earlier this month the Department of Interior announced steps it will take to address methane emissions from fossil fuel production on public lands. But whether the EPA will follow suit this year is still unknown.
The UNFCCC Paris negotiations were the focal point of the Obama administration’s – and the global community’s –international climate attention for the past couple of years, and rightly so. But the calendar is actually well set up for the administration to use some of its post-Paris international bandwidth to try to achieve breakthroughs in two other major international negotiations outside of the UFCCC during President Obama’s remaining time in office.
First, the Obama administration will be able to take a final run at getting countries to agree to amend the Montreal Protocol – which is designed to protect the ozone layer by phasing out a whole class of different pollutants – to address hydrofluorocarbons, a short-lived but highly potent greenhouse gas used in refrigeration and air conditioning. For that to happen, though, the United States will need to be able to achieve a final breakthrough with India – a country with which the United States has improved its climate relationship, but still often finds itself at odds with in climate negotiations. Second, countries are looking to tackle greenhouse gas pollution in the aviation sector at the triennial UN International Council of Aviation Organization assembly meeting later this year. A robust outcome there would constitute another significant international achievement.
EPIC: After much contention, the U.S. is expected to begin exporting LNG in 2016. What impact will that decision have both domestically and internationally?
Ori: Exports are a big deal in one sense, but I think it is more psychological than anything. Remember, it was only a decade ago that we were building LNG import terminals, expecting a future of domestic gas scarcity. Then shale gas came along, and the picture changed quite dramatically. So far, the Federal Energy Regulatory Commission (FERC) has approved six LNG export terminals with total export capacity of 10.6 billion cubic feet per day. This is about what Qatar exported last year. If the U.S. fully utilized that capacity it would make us one of the world’s largest LNG exporters.
But I think there are real questions about whether we will use it. A lot of these projects were initiated when U.S. natural gas was in the $3 per million Btu range and countries in Asia, especially Japan and Korea, were paying up to $20 per MMBtu for spot LNG. So that looked like a huge opportunity. U.S. prices are even cheaper today at $2.25 per MMBtu. But Asian LNG prices are effectively linked to oil prices, which have plummeted, so today’s LNG prices in Japan, Korea, and China are right around $7 per MMBtu, while prices in Europe are as low as $5 per MMBtu. By the time you add up the costs of liquefaction, shipping, and regasification, U.S. LNG is only marginally competitive in these places in the best case, and not competitive in many instances today.
But the value over the longer term may be to put a cap on natural gas prices in some regions, and to offer greater diversity in others. This is especially important in Central and Eastern Europe, where many countries today rely on Gazprom for 100 percent of their gas. The lack of competition leaves them hostage to Gazprom rates and has also left them vulnerable to various geopolitical disputes. In the future, these countries could bid for LNG from the United States. Lithuania and Poland both recently opened new LNG import terminals. Prices in Europe would have to rise substantially to draw U.S. LNG shipments away from Asia on a sustained basis, but the option would be there.