Oil remains the lifeblood of the global economy, and will not easily be phased out just because the industry is undergoing a crisis. Until policymakers and climate activists grapple seriously with the political economy of oil, the quest for net-zero emissions will be more aspirational than realistic.
LONDON – There are no ready solutions to the dilemma of oil. Daily life as most of us know it depends on the production and transportation of oil, yet consumption of hydrocarbons is a key driver of climate change, which jeopardizes the long-term habitability of the planet. Worse, the need to supply the world with affordable oil has long been a cause of poor governance in the countries that produce it, as well as a source of geopolitical instability. That is unlikely to change anytime soon.
Today’s global economy depends principally on the oil output of three countries: the United States, Saudi Arabia, and Russia. But the position of the US relative to the other two will not last, because American shale-oil output will probably begin to decline from the end of this decade onward.
The need for some kind of modus vivendi among the three major oil producers – and the difficulty of finding one – became abundantly clear during the COVID-19 lockdowns earlier this year. After maintaining an oil alliance (“OPEC Plus”) since November 2016, Russia and Saudi Arabia ended up at cross purposes when Chinese demand for oil plummeted under pressure from the coronavirus-induced slump. Frustrated over Russian President Vladimir Putin’s refusal to agree to new production cuts, Saudi Crown Prince Mohammed bin Salman (MBS) decided to flood the market in a bid to increase Saudi Arabia’s market share.
Since MBS’s gambit came just as almost every major economy was shutting down in response to the virus, oil prices predictably crashed. Only after US President Donald Trump threatened the Saudis with an American military withdrawal did OPEC Plus patch things up. The resulting production cuts have pushed oil prices back up from their March floor. But it is unclear how much US shale producers contributed to the reduction in supply. To the extent that they have once again been free-riding on OPEC Plus’s output cuts, the resentment that drove Putin to break with MBS in the first place will only intensify.
The rise of a de facto oil triumvirate has raised hopes in some circles for deeper international cooperation on all energy issues, with the World Economic Forum calling the COVID-19 oil crisis an opportunity for a “new energy order.” But it is fanciful to think that oil’s current woes are a straightforward opportunity to hasten and manage its ultimate retirement. Oil markets are structurally, politically, and financially dysfunctional. Trying to reform them for their own sake, let alone with an eye toward radically reducing oil consumption, will necessarily exacerbate their flaws.
Since 2014, oil prices have been too low to sustain most producers over the long term. The return to around $40 per barrel since March did not rescue the shale industry so much as put it on life support. The pioneer shale company, Chesapeake Energy, filed for bankruptcy in June, which attests to the fact that prices are still too low to support US producers’ substantial debt-service costs. The situation is even more dire for struggling OPEC members, which is why Saudi Arabia has had such a hard time persuading Iraq, Nigeria, and Angola to adhere to the group’s current production quota.
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With such poor prospects for profitability in the sector, investment has taken a huge hit. The International Energy Agency expects the decline in investment this year to be the largest ever recorded – and this at a time when new oil discoveries are replacing only about one of every six barrels consumed.
If demand remains depressed, the economic and political crisis already engulfing Iraq risks spiraling toward the type of catastrophe that overwhelmed Venezuela after the 2014-15 oil-price crash. On the other hand, if demand does recover, curtailed productive capacity could lead to a period of oil shortages and high prices before the transportation sector can be significantly electrified.
For all its harsh realities, the COVID-19 oil crisis appears to have encouraged more energy utopianism. Though such claims can never be made with complete certainty, it is possible that the world economy reached peak oil consumption in 2019. The problem is that if this turns out to be the case, the cause will be people’s inability to resume their previous levels of physical movement, implying a weak or nonexistent recovery.
More to the point, those hoping for a successful transition to clean energy have yet to engage realistically with the existing relationship between oil consumption and economic growth. The United Nations is trying to leverage the crisis to secure a broad new commitment to achieve net-zero emissions by 2050. But this will accomplish little unless it leads to an honest reckoning with the direct and indirect costs associated with using renewable energy to replace activities currently fueled by oil and gas.
Routine denial of these complications is pervasive, and big Western oil companies like BP, Shell, and Total have tended to perpetuate it by proclaiming their own net-zero 2050 targets. Industry actors insist that they will fully offset their continued oil and gas production, even though they know that the potential of negative-emissions technology (such as carbon sequestration and storage) remains limited, and that deploying it requires land now used to grow food.
Governments, meanwhile, have been happy to moralize about what is necessary to address climate change, even as they assign higher priority to short- and medium-term fossil-fuel projects. There is a reason why certain governments have spent so much geopolitical capital on gas transportation like the Nord Stream II pipeline. If the European Union and the British government had the slightest confidence that they could quickly dispense with gas as an energy source, they would not be as interested as they are in maintaining reasonable relations with Iran, home to much of the South Pars gas field (easily the world’s largest).
Over the next few years, the economic and political difficulties caused by oil will invariably force more energy realism. But this need not make facing the climate crisis more difficult. Serious climate action requires serious judgment about how a transition to clean energy can practically be accomplished. Energy and climate realism are equally imperative, as is a strategy to confront the enormous geopolitical disruption that a shift away from oil will bring. In each case, policymakers will need to focus squarely on managing and containing the consequences of inevitably problematic outcomes.
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LONDON – There are no ready solutions to the dilemma of oil. Daily life as most of us know it depends on the production and transportation of oil, yet consumption of hydrocarbons is a key driver of climate change, which jeopardizes the long-term habitability of the planet. Worse, the need to supply the world with affordable oil has long been a cause of poor governance in the countries that produce it, as well as a source of geopolitical instability. That is unlikely to change anytime soon.
Today’s global economy depends principally on the oil output of three countries: the United States, Saudi Arabia, and Russia. But the position of the US relative to the other two will not last, because American shale-oil output will probably begin to decline from the end of this decade onward.
The need for some kind of modus vivendi among the three major oil producers – and the difficulty of finding one – became abundantly clear during the COVID-19 lockdowns earlier this year. After maintaining an oil alliance (“OPEC Plus”) since November 2016, Russia and Saudi Arabia ended up at cross purposes when Chinese demand for oil plummeted under pressure from the coronavirus-induced slump. Frustrated over Russian President Vladimir Putin’s refusal to agree to new production cuts, Saudi Crown Prince Mohammed bin Salman (MBS) decided to flood the market in a bid to increase Saudi Arabia’s market share.
Since MBS’s gambit came just as almost every major economy was shutting down in response to the virus, oil prices predictably crashed. Only after US President Donald Trump threatened the Saudis with an American military withdrawal did OPEC Plus patch things up. The resulting production cuts have pushed oil prices back up from their March floor. But it is unclear how much US shale producers contributed to the reduction in supply. To the extent that they have once again been free-riding on OPEC Plus’s output cuts, the resentment that drove Putin to break with MBS in the first place will only intensify.
The rise of a de facto oil triumvirate has raised hopes in some circles for deeper international cooperation on all energy issues, with the World Economic Forum calling the COVID-19 oil crisis an opportunity for a “new energy order.” But it is fanciful to think that oil’s current woes are a straightforward opportunity to hasten and manage its ultimate retirement. Oil markets are structurally, politically, and financially dysfunctional. Trying to reform them for their own sake, let alone with an eye toward radically reducing oil consumption, will necessarily exacerbate their flaws.
Since 2014, oil prices have been too low to sustain most producers over the long term. The return to around $40 per barrel since March did not rescue the shale industry so much as put it on life support. The pioneer shale company, Chesapeake Energy, filed for bankruptcy in June, which attests to the fact that prices are still too low to support US producers’ substantial debt-service costs. The situation is even more dire for struggling OPEC members, which is why Saudi Arabia has had such a hard time persuading Iraq, Nigeria, and Angola to adhere to the group’s current production quota.
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Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.
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With such poor prospects for profitability in the sector, investment has taken a huge hit. The International Energy Agency expects the decline in investment this year to be the largest ever recorded – and this at a time when new oil discoveries are replacing only about one of every six barrels consumed.
If demand remains depressed, the economic and political crisis already engulfing Iraq risks spiraling toward the type of catastrophe that overwhelmed Venezuela after the 2014-15 oil-price crash. On the other hand, if demand does recover, curtailed productive capacity could lead to a period of oil shortages and high prices before the transportation sector can be significantly electrified.
For all its harsh realities, the COVID-19 oil crisis appears to have encouraged more energy utopianism. Though such claims can never be made with complete certainty, it is possible that the world economy reached peak oil consumption in 2019. The problem is that if this turns out to be the case, the cause will be people’s inability to resume their previous levels of physical movement, implying a weak or nonexistent recovery.
More to the point, those hoping for a successful transition to clean energy have yet to engage realistically with the existing relationship between oil consumption and economic growth. The United Nations is trying to leverage the crisis to secure a broad new commitment to achieve net-zero emissions by 2050. But this will accomplish little unless it leads to an honest reckoning with the direct and indirect costs associated with using renewable energy to replace activities currently fueled by oil and gas.
Routine denial of these complications is pervasive, and big Western oil companies like BP, Shell, and Total have tended to perpetuate it by proclaiming their own net-zero 2050 targets. Industry actors insist that they will fully offset their continued oil and gas production, even though they know that the potential of negative-emissions technology (such as carbon sequestration and storage) remains limited, and that deploying it requires land now used to grow food.
Governments, meanwhile, have been happy to moralize about what is necessary to address climate change, even as they assign higher priority to short- and medium-term fossil-fuel projects. There is a reason why certain governments have spent so much geopolitical capital on gas transportation like the Nord Stream II pipeline. If the European Union and the British government had the slightest confidence that they could quickly dispense with gas as an energy source, they would not be as interested as they are in maintaining reasonable relations with Iran, home to much of the South Pars gas field (easily the world’s largest).
Over the next few years, the economic and political difficulties caused by oil will invariably force more energy realism. But this need not make facing the climate crisis more difficult. Serious climate action requires serious judgment about how a transition to clean energy can practically be accomplished. Energy and climate realism are equally imperative, as is a strategy to confront the enormous geopolitical disruption that a shift away from oil will bring. In each case, policymakers will need to focus squarely on managing and containing the consequences of inevitably problematic outcomes.