The oil crash unleashed instant panic across financial markets, but Saudi Arabia’s decision to start a price war may yet have profound consequences for the world’s embrace of cleaner energy.

“It will definitely put downward pressure on the appetite for a cleaner energy transition,” Fatih Birol, head of the International Energy Agency, said of the historic fall in crude prices.

Analysts warned that the oil price shock could hurt demand for electric vehicles (EV) and dim the appeal of energy efficiency measures because the turmoil—allied to a slowing global economy—had a chilling effect on the most ambitious renewable plans.

Unlike the period of low oil prices during 2014-16, many countries including the U.K. and the EU have set out ambitious targets to cut net emissions to zero in the coming decades that require a huge shift in energy use.

Birol said the situation would be “a good test” of all the climate commitments that government and companies had been making recently. “Observers will be quick to notice if governments’ and companies’ emphasis on the transition dies down when market conditions become more challenging.”

Cheap petrol is likely to make EVs less attractive to consumers, at least in the short term. The global EV market had already suffered a slowdown last year because of weaker demand in China and the Americas. It is a picture that the spread of coronavirus risks exacerbating as the global economy stumbles.

“The vehicle market is already shrinking and is now hit by potential supply chain shortages and lower consumer confidence,” the research group Bloomberg NEF noted in a recent report. “We now expect EV sales in China to take a hit in 2020. … This could still fall further as the full impact of the coronavirus becomes clear.”

Increasing the threat to the energy transition is that low energy prices often reduce the economic incentives to conserve it and find ways of using it more efficiently.

“Cheaper energy always leads to using energy in a less efficient manner,” Birol said. “Low energy prices will make the economics of energy saving less attractive due to cheap oil and gas, and this will definitely not be good news.”

For the power sector, the effect of cheaper oil looks set to be more mixed.

Power generation is not directly affected by shifts in the oil price because crude is rarely used for power generation. However, government policies that will shape the future of renewable energy could shift because of the current shock.

While the cost of wind and solar power have plummeted over the past decade, the level of government subsidy for them has also been declining in many countries. Even before the economic shock of coronavirus, investment in clean energy peaked in 2017 and fell slightly in 2018 and the first half of 2019.

“Oil price shocks a few years ago did lead to downward pressure on most investment by oil and gas companies,” said Helen Mountford vice-president for climate and economics at WRI. “I think we are in a different world today, and I think we will see a different result,” she added, pointing to the lower prices of wind and solar.

Another factor that could shape the outlook for clean energy is that oil and gas companies find it harder to fund the investments in renewable energy they had planned.

Valentina Kretzschmar, head of corporate research at Wood Mackenzie, points out that low oil prices also make it less attractive for producers to make big investments in new exploration projects.

“The argument that oil and gas companies will leave value on the table if they invest in renewables, that argument really does not hold at $35 per barrel,” she said. Analysis by Wood Mackenzie suggests that at current oil prices, more than 85% of oil and gas projects globally would yield a return of less than 15%.

However, some believe that the move towards cleaner energy has enough momentum to see off any challenge posed by lower oil prices.

While renewable energy projects typically generated lower returns than oil and gas exploration, they also offered long-term price stability that could become more attractive in the current market, said Mark Lewis, head of climate change investment research at BNP Paribas Asset Management.

“Already investors’ view of the oil sector has been under pressure for the past 12 months,” Lewis said. “It is obviously the case, if there is a very severe economic shock, then renewables and climate change may risk falling down the political agenda again, but I don’t think they would fall as badly as they have in the past. … This is different, the economics have moved too far now.”

Indeed, some analysts said that low oil prices could hasten a structural shift away from fossil fuels by making energy companies less attractive to investors. The generous dividends coveted by investors were already starting to disappear, with Occidental Petroleum Corp. slashing its payout on March 10.

“Governments need to keep the eye on the ball, here the ball is climate change,” Birol said. “These issues are big issues—coronavirus, market conditions—but these are temporary. Maybe in a few months, maybe longer, the market conditions will recover, but our climate challenge will still be there.”

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