Oil prices will whipsaw as we move to net zero, which could be disastrous for low-income producer countries
- Written by Adi Imsirovic, Fellow in Energy Economics, University of Surrey
One huge question for the future of the global economy is how oil will be affected by the transition to net zero. Any energy economist will tell you that predicting oil prices is something of a fool’s errand, given all the uncertainties involved – but it would be even more foolish not to think about them when they are so fundamental to everything we do.
First, a caveat. It hasn’t been the easiest few months in the battle to achieve net zero. Numerous multinational companies and governments have been rowing back[1] on their commitments, under pressure from shareholders and voters to avoid spending money to solve problems that can still seem far into the future.
From my perspective, this can be incredibly frustrating, since anyone who has studied the numbers understands that net zero is the only sensible way forward. Yes, the International Energy Agency reckons[2] that we need to invest an additional US$4.5 trillion (£3.5 trillion) a year in clean energy to meet the Paris climate goal[3] of restricting global warming to 1.5°C. But by my calculation[4], it will cost society about US$8.7 trillion a year in climate-related damage if we don’t spend that money.
When this is the reality, you have to assume common sense will still prevail. If so, one of the implications is we’re heading for a future in which most transport will be electric. Again, this is unarguably the best way forward.
The average well-to-wheel efficiency[5] of electric vehicles (EVs) is about 80%, which refers to the proportion of the energy released from the battery that actually turns the wheels. By the same measure, internal combustion vehicles are only 20% efficient. EVs are, in fact, cleaner even when[6] they are powered by electricity from fossil fuels.
If EVs are going to dominate transportation, that implies a huge change in the world fleet of vehicles in the years ahead. Notwithstanding their enormous growth, only 14%[7] of all new car sales are currently electric, while shipping[8] and especially aviation[9] are considerably further behind.
Brent crude oil price, 2000-24
Zero-emission police cars in South Pasadena, California, the state with the highest EV adoption in the US.
Associated Press/Alamy[17]
This does not bode well for oil producers, especially if they are subject to carbon taxes. Interestingly, among the least-affected producers will be Saudi Arabia[18] and the United Arab Emirates (UAE), who together produce around 15%[19] of all world oil.
Their oil production is among the least carbon intensive[20] in the world. This is because their oil lies in onshore basins from which it is relatively easy to extract, meaning it will be subjected to lower tariffs from the likes of the European Carbon Border Adjustment Mechanism[21] (currently producers are exempt from the CBAM, but this is likely to change in future).
The Saudi Vision 2030 initiative has been hugely publicised.
Eric Lafforgue/Alamy[22]
Even so, Saudi and the UAE are still trying to reduce their overall carbon emissions by diversifying[23] their economies away[24] from fossil fuels into area such as tourism and hospitality, finance, real estate, manufacturing and renewables. To help pay for this, they’re trying to keep oil prices as high as possible for as long as possible.
For other members of oil producers cartel Opec[25] (Organization of the Petroleum Exporting Countries), such as Nigeria, Venezuela, Angola, Congo and Algeria, diversification is not so easy. They depend too much on oil and gas revenues to be able to divert surpluses into, say, sovereign wealth funds[26] that can invest in cleantech. This means they are much more vulnerable to changes in oil prices and carbon taxes.
Opec could play a pivotal role in helping these countries diversify into cleaner sources of energy and other sectors. Instead of just focusing on themselves, Saudi and the UAE should help to drive this.
None of this is to suggest we will stop using oil in the years ahead. It is a resource far bigger than its energy content, essential for everything from plastics to petrochemicals. However, we shall have to stop burning it. The resulting high price volatility will add extra challenges to the energy transition, but it will also create opportunities for savvy investors and innovators in alternative fuels like biofuels and green hydrogen.
References^ rowing back (www.ft.com)^ International Energy Agency reckons (www.weforum.org)^ Paris climate goal (unfccc.int)^ my calculation (link.springer.com)^ well-to-wheel efficiency (www.bluemaritimecluster.no)^ even when (www.sustainabilitybynumbers.com)^ only 14% (www.virta.global)^ shipping (www.oxy.com)^ especially aviation (trellis.net)^ Trading View (www.tradingview.com)^ two-thirds of world oil (www.eia.gov)^ road vehicles (www.reuters.com)^ less than 30% (www.imf.org)^ over US$7 trillion (www.imf.org)^ largest share (afdc.energy.gov)^ become more sensitive (www.pkverlegerllc.com)^ Associated Press/Alamy (www.alamy.com)^ Saudi Arabia (www.aramco.com)^ around 15% (www.eia.gov)^ least carbon intensive (www.science.org)^ Carbon Border Adjustment Mechanism (taxation-customs.ec.europa.eu)^ Eric Lafforgue/Alamy (www.alamy.com)^ diversifying (www.vision2030.gov.sa)^ economies away (u.ae)^ Opec (en.wikipedia.org)^ sovereign wealth funds (www.elibrary.imf.org)
