Oil’s endgame could be highly disruptive

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Oil’s endgame could be highly disruptive

The Economist | March 14, 2024

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Governments everywhere are designing policies to reduce the demand for oil and boost alternative sources of energy, as they seek to fight climate change. Technologies such as those behind electric vehicles are only becoming cheaper and more advanced. As the Economist special report argues this week, the coming peak and subsequent decline of global demand for oil will determine prices and production over the decades to come not the supply.

Perversely, this shift will grant some producers more market power. The biggest, least carbon-intensive and cheapest reserves of petroleum by far are found in Saudi Arabia and its immediate OPEC neighbours in the Persian Gulf. As the market for oil shrinks, their share of production will soar. Meanwhile, other oil powers will be left behind. Today national oil firms in several dozen countries in Africa, Latin America and Asia are pumping oil that is higher-cost and more carbon-intensive than the oil in the Gulf.  Because governments in many producing countries are often unduly reliant on commodity revenues, the failure of some national oil firms could lead to debt crises, bankruptcies and a decade of lost development. This would be a mirror-image of the debt crises that engulfed Latin America in the 1980s, after rising oil prices widened importing countries’ trade deficits and crippled their ability to repay their debts.

How to manage this disruption? Speeding up the energy transition is necessary to tackle climate change, but the faster the transition, the worse the concentration of market power, and the greater the shock to high-cost producers. In the meantime coping mechanisms such as governments’ strategic petroleum reserves could help to reduce volatility for oil consumers.

For the unlucky producers, meanwhile, the priority must be to diversify while oil prices are relatively high and demand still strong.  Governments, too, must seek to ensure that economies can diversify away from oil, by setting business-friendly rules and spending on things like infrastructure and education, to allow private enterprise to thrive. Even so, some countries may nonetheless eventually require bail-outs, putting multilateral institutions under further strain. The supply-led oil shocks of the past half-century were a frequent source of geopolitical tumult. Unless the coming transition is approached with more foresight, the next-half century will be no less fraught.

3 key takeaways from the article

1. Governments everywhere are designing policies to reduce the demand for oil and boost alternative sources of energy, as they seek to fight climate change. The coming peak and subsequent decline of global demand for oil will determine prices and production over the decades to come not the supply.
2. Perversely, this shift will grant some producers more market power. Meanwhile, other oil powers will be left behind which have high extraction cost and are more carbon-intensive.
3. How to manage this disruption? Speeding up the energy transition is necessary to tackle climate change, but the faster the transition, the worse the concentration of market power, and the greater the shock to high-cost producers. In the meantime coping mechanisms such as governments’ strategic petroleum reserves could help to reduce volatility for oil consumers. Governments must seek to ensure that economies can diversify away from oil, by setting business-friendly rules and spending on things like infrastructure and education, to allow private enterprise to thrive. 

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Topics:  Oil, Global Economy, Alternative Energy