As Oil Prices Fall, Increased Production Could Mean Greater Risk for Communities and the Environment

Anyone who drives a car has noticed by now that gas prices have dropped dramatically in the last several months, a result of falling global oil prices. But, while that is good for our wallets, it may not be good for the communities and ecosystems surrounding oil developments worldwide.

After several years of mostly stable oil prices around $110 per barrel, prices began to drop in mid-2014. The price per barrel of crude oil has now fallen below $50 for the first time since May 2009, a result of lower global demand brought on by weak economic growth and increases in production in the United States.

These lower prices are having a significant economic impact on countries with heavily oil-dependent economies like Venezuela, which gets 95 percent of its export revenues from oil. Deputy Prime Minister Rowsch Nuri Shaways of fellow OPEC member Iraq told attendees at the World Economic Forum this week, “Because of the new challenges, especially the price of oil, Iraq has to try its best to raise it oil production and exports.” Russia, which depends on oil for 70 percent of its export revenue, loses about $2 billion in revenues for every dollar decrease in oil prices.

There has been much speculation recently that this downturn in oil prices could be good for the environment, as many oil producers have announced that they are delaying or halting planned developments because the economics do not work at such a low price.

However, at Equitable Origin, there is concern that, if prices stay this low, countries that rely on oil revenues will increase production at existing oil and gas production sites, in order to maintain their level of income, making up in quantity what they are losing in price.

“We haven’t seen a production slow down” as a result of falling oil prices, EO co-founder Manuel Pallares said. “We have seen investments cut back, and this will affect future production, but this is not an immediate impact.” In the meantime, he added, more oil will be produced, amplifying the oil glut on the market, and “prices may plummet even more. It’s all part of the vicious cycle around oil prices.”

EO’s principal concern is that this pressure to quickly ramp up production to counter falling prices could lead oil and gas producers to cut corners in order to save money, increasing social and environmental risks to the surrounding areas. “Oil companies and governments are likely to start cutting costs in every aspect of their operations, especially aspects that do not provide an economic return,” Pallares noted. Because implementing good environmental and social practices is generally seen as a cost, rather than an investment, these programs may be some of the first to see heavy cutbacks. “There is a point where reduction in price will affect environmental and social performance, and that is something that people should be very concerned about.”

And even if lower prices do lead to a slow-down in future oil developments in some places, this may not be completely good news for the environment and local communities. “We may see a slowdown in the expansion of the oil frontier, but that does not guarantee anything for the environment,” Pallares said. “Many countries that depend heavily on oil revenues, for example in Latin America, may be more inclined to develop other sectors, such as forestry or intensive agriculture, to offset the lack of revenues from oil.” These sectors have the potential to be much more widely and permanently destructive to the environment than responsibly managed oil or gas production.

Such uncertainty and potential for threats to the environment and local communities in oil-producing nations means a greater need than ever for EO’s auditing and certification work in certain parts of the world, to help ensure that oil is produced in ways that guarantee environmental and social welfare.

“The public should not accept that the collapse in oil prices is any justification for lowering environmental and social standards at oil and gas projects that are already underway,” Pallares said. “We cannot just accept oil at any price. That is not legitimate, and it is not ethical.”

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