Could the oil shock and COVID-19 be positive for climate investment? Here's five reasons why

The COVID-19 pandemic is a worldwide national emergency that has tragically touched many nations. Markets are extremely volatile, oil prices have plummeted and the global economy has been severely impacted.

Historically speaking, we would expect low oil prices to negatively influence the transition to a net zero economy. Yet, at Lombard Odier, we believe that the oil price wars and coronavirus could have a positive impact on climate change. Why? Because the positive feedback loop of policy, market forces and consumer patterns are increasingly supporting the road to decarbonisation.

Furthermore, renewable energy, and their technologies, are well positioned for growth and the circular revolution is underway. In short, this new proposition is better. And it will not be hindered by turbulent markets.

We believe there are five reasons low oil prices could accelerate the transition to net-zero:

1. Policy

Policies are working to support decarbonisation and the deployment of clean transportation. For instance, more and more cities are moving to ban internal combustion engines and regulating fleet carbon emissions. According to the World Health Organization (WHO) worldwide, about seven million people die due to air pollution every year. This is killing more people than smoking.

Policy supporting the deployment of clean energy and transportation therefore draws its impetus not only from climate change, but increasingly also from the profound human health and economic costs of severe local air pollution. Other policies such as the EU's USD 1 trillion Green Deal, which aims for Europe to reach to net-zero by 2050 or central banks stress testing their markets for climate risks (The Bank of England) are also leading the way. We believe that the government may also increase low-carbon, growth-boosting fiscal stimulus to counteract the economic downturn caused by the COVID-19 virus.

2. Renewables and batteries

Due to innovation and economies of scale, renewables and batteries costs are being driven down and are increasing in efficiency. Wind technology and lithium batteries are getting cheaper. For example, since 2019, the cost of wind turbines has gone down by 40% per megawatt. According to research, wind and solar technologies provide seven times more energy for the same cost compared to oil trading at $60 per barrel. Battery production costs are largely immune to oil price dynamics and will continue to decline as economies of scale ramp up and cell chemistry efficiencies accelerate. As costs continue to fall, renewables will continue to gain market share.

3. Consumer behavior

In recent years, we have seen a consumer patterns change due to our unsustainable economic models. Buyers are demanding sustainable goods and services in order to protect the planet. The evolution of business models is supporting this change. Lease purchase, for instance, is now the predominant model for buying new vehicles in developed markets. This works in favour of electric vehicles, which have a higher upfront cost but lower total cost of ownership. And with regulation on fleet average emissions enforcing electric vehicle (EV) adoption, whether consumers want to drive more environmentally or not, we believe a reduced oil price will have little impact on the climate transition already underway in the automotive sector.

4. COVID-19 effect on oil industry

The economic downturn in China and elsewhere, as a result of the pandemic, has dampened oil demand. Coupled with slowing tourism and global travel, our reliance on other markets and our exposed supply chains have been thrown into sharp relief. If we begin to localise our production we may see a type of “de-globalisation" which could reduce global transportation needs. This would affect the aviation, shipping and fleet industries, which are extremely polluting. In a situation such as this, we could see governments choosing local renewable solutions in times of market turbulence. Our climate transition strategy focuses on technology solutions and adaptation opportunities that stand to gain market share during such a transition.

5. Peak oil demand is behind us

Oil suppliers realise peak-oil demand has passed, which will likely extend the price war in the longer-term. Much of the higher-cost oil produced globally in the legacy energy sector is especially problematic for climate change (arctic oil, tar sands, methane flaring from fracking). The risk of producers suffering huge write-downs as a result of 'stranded assets' is increasing as momentum builds behind the move to a net-zero economy. If low prices are here to stay, investors could start looking for other opportunities in greener alternatives to move away from fossil fuels.