In the face of escalating concerns about climate change, the need for comprehensive policies to prevent climate change has become increasingly imperative. However, these policies, while essential for safeguarding the planet's ecosystems, are also exerting a growing influence on the crude oil markets.
In this article, we will delve into the potential impact of climate change policies on crude oil prices.
What is Crude Oil?
Crude oil is a valuable and widely traded commodity that serves as a vital source of energy worldwide. It is a naturally occurring fossil fuel composed of hydrocarbon deposits, extracted from underground reservoirs.
Crude oil comes in different types, each with its own characteristics and extraction locations. One prominent type is Brent crude oil, extracted from oil fields in the North Sea. Brent oil is known for its relatively low sulfur content and is used as a benchmark for pricing crude oil globally.
Another important product derived from crude oil is Low Sulfur Fuel Oil (LSFO), which has gained significance due to environmental regulations aiming to reduce emissions from shipping vessels. LSFO is used as a cleaner alternative to traditional high sulfur fuel oil (HSFO) and plays a crucial role in the maritime industry.
In addition to Brent oil, other types of crude oil include West Texas Intermediate (WTI), Dubai Crude, and OPEC Basket, representing different regions and qualities.
Crude oil is refined into various petroleum products, including gasoline, diesel, jet fuel, heating oil, and low sulfur fuel oil, all of which are essential for transportation, industrial processes, and heating.
To trade crude oil futures, there are several prominent exchanges under Orient Futures Singapore. These include the ICE Futures Singapore (ICE SG), where Mini Brent Crude Futures and Mini WTI Crude Futures are traded. Another exchange is the Shanghai International Energy Exchange (INE China), which offers INE Crude Oil Futures such as Low Sulphur Fuel Oil Futures and Medium Sour Crude Oil Futures.
Impacts of Climate Change Policies on Crude Oil Prices
To gain a better understanding of the influence of climate change policies on crude oil prices, it is crucial to examine past examples. Here are two recent instances where climate change policies were implemented and their effects on crude oil prices.
Carbon Pricing Mechanisms in Canada
In 2019, Canada implemented the Greenhouse Gas Pollution Pricing Act, which introduced a nationwide carbon pricing system. The policy aimed to reduce greenhouse gas emissions by imposing a price on carbon emissions for provinces without their own carbon pricing plans. This affected various industries, including the oil and gas sector.
The implementation of carbon pricing in Canada had a direct impact on crude oil prices, particularly heavy crude oil. As a result of the policy, oil producers faced additional costs associated with carbon emissions. The expenses related to extracting, refining, and transporting heavy crude oil increased, leading to downward pressure on its price.
While there might be other factors that could affect the price of crude oil, the implementation of the carbon pricing mechanism in Canada contributed to a decline in heavy crude oil prices.
China's Transition to Electric Vehicles (EVs)
China has implemented several climate change policies to reduce carbon emissions, with a specific focus on transitioning to electric vehicles (EVs). The Chinese government has implemented robust measures to promote EV adoption, including subsidies, incentives for manufacturers, and the development of charging infrastructure.
This policy shift in China has the potential to impact crude oil prices indirectly. As the demand for gasoline and diesel vehicles decreases in favor of EVs, the demand for crude oil used in transportation fuels may experience a decline over time.
The transition to electric vehicles (EVs) in China is expected to have a downward effect on crude oil prices in the long term. The decrease in demand for crude oil used in transportation fuels can put downward pressure on crude oil prices.
United States’ New Measures to Compact Climate Change
In April this year, United States President Joe Biden announced new measures aimed at transitioning from the use of crude oil to renewable energy sources.
President Biden has committed to limiting global warming to a maximum of 1.5 degrees Celsius above preindustrial temperatures. This threshold is crucial to avoid significant increases in the likelihood of catastrophic impacts, as stated by scientists.
Here’s how the Biden administration has performed so far across 10 key climate priorities:
Figure 1. US Pesident Joe Biden’s Administration Progress on Climate Action
One key milestone that the US is working towards is to get all new passenger vehicles to produce zero emissions by 2035.
According to the World Resources Institute, there has been a 87% reduction in the cost of electric vehicle batteries over the past decade. This cost decline indicates that new electric vehicles are projected to achieve price parity with comparable combustion engine vehicles by 2025, if not earlier.
In September 2020, California Governor Gavin Newsom also took a decisive step by signing an executive order that mandates the California Air Resources Board to establish standards for gradually phasing out the sale of polluting passenger vehicles by 2035.
The electrification of buses and other medium- to heavy-duty diesel vehicles has also gained momentum through the signing of the Zero Emission Medium- and Heavy-Duty Vehicle Initiative in July 2020, involving 15 states.
To advance these efforts, President Biden might also issue an executive order directing the Environmental Protection Agency (EPA) to establish national clean car and truck standards. This would set requirements for emissions and fuel efficiency to promote the adoption of cleaner technologies and help mitigate the environmental impact of transportation.
Although the push to electrify vehicles would contribute to the reduction of overall pollution, it could potentially decrease the demand for crude oil used in transportation fuels, and thus, exerting downward pressure on its price.
Crude Oil Market News
Despite all the potential risk that the Crude Oil prices might face, the International Energy Agency (IEA) reported that the global oil demand is set to grow from 2.4 mb/d in 2023 to 102.3 mb/d. This is a new record set for the global demand of oil.
While oil demand is expected to rise, supply is projected to increase only marginally.
Global oil production fell by 660 kb/d to 100.6 mb/d in May, primarily due to production cuts from OPEC+ members and disruptions in Iraq and Canada. Saudi Arabia led the decline with a voluntary cut of 500 kb/d and plans to reduce output by an additional 1 mb/d in July.
Despite this, oil demand is expected to continue rising while supply increases only marginally. The June OPEC+ meeting extended production curbs through 2024.
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