Oil prices have plummeted. A barrel of Brent, an oil blend mainly extracted from the North Sea, is currently trading for around $65 (£48). It’s a price not seen for a sustained amount of time since 2019, and a far cry from the $85 (£63) per barrel in 2024.
The price of oil is one of the main drivers behind the cost of everyday items, so a discount should be welcomed by consumers – but it leads to increased demand, and a greater weight on the environment.
Yet, it may not be all bad news.
Being forced to sell their goods at a discount ultimately hurts most businesses so in this case, cheap oil hurts oil industry companies.
According to a new study by the Centre for Economic Policy Research (CEPR), this business environment is enough to convince some of them to invest in green energy research.
For those firms, cheap oil is “a negative shock to their profitability,” and “if they think it’s going to last for a few years, that influences the kind of innovations they’re doing,” says Esther Ann Bøler, an assistant professor at Imperial Business School and a research affiliate at CEPR who co-authored the study.
The research looked at Norwegian firms which supplied oil-extracting companies with “intermediate inputs” like capital and technology. Bøler says they noted that the most affected firms were the ones now looking to transition towards green innovation.
It’s nothing more than “a story about business innovation,” Bøler believes, because those firms “might have comparative advantages in fields that are somewhat technologically close.”
Such companies have the knowledge and the technological skills to pursue other avenues, so “they switch to something else.”
The trend is growing. For the firms that were exposed to the price shock, the value of green research and development spending increased by 35 per cent,” Bøler says. At the same time, the share of firms investing in green energy research “rose by 5.5 percentage points, from a baseline of 7.5 per cent,” she added.
The study found that once spending on research starts, regardless of the research area itself, there is a 90 per cent chance that businesses will stick with it.
The development could be significant as cheap oil is likely here to stay.
OPEC+, a cartel consisting of members of the Organisation of Petroleum Exporting Countries and their allies, has agreed to three production increases of 411,000 barrels per day in three months, rolling back over a third of their voluntary cuts agreed in late 2022.
Analysts believe that the supply spike could be an attempt to force overproducing countries to comply with their quotas, gaining market share, and appeasing US president Donald Trump.
Volker Roeben, dean of the Law School at Durham University and author of a study on OPEC’s policy drivers, is, however, cautious to ascribe the cartel’s decisions solely to the current political environment.
“If you look at the empirical side of things, a correlation exists between anticipated demand and production. Over time, the anticipated demand is the best predictor of output policy,” Roben says.
This would suggest the cartel may be agreeing on production hikes now to account for a possible “anticipated drop in demand”.
Such a drop would be likely in an economic downturn, and could force OPEC+ to cut production once again to sustain the price of oil. Doing so without any headroom could cause a supply crisis that would deepen a downturn.
For Roeben, energy demand and prices are influenced by factors including “economic production, confidence … and domestic consumption” and “the broadest share of oil goes into manufacturing and industry.”
“Ultimately, it is about the real economy,” Roeben said.
