As US and Europe push climate policies, Middle East and Russian state oil producers stand to benefit
- In the long term, US and EU green policies to reduce fossil fuel investments will increase the market share of Middle Eastern and Russian oil and gas producers
- Global demand for fossil fuels shows no sign of slowing as developing countries aim to grow rapidly to meet the aspirations of their citizens
A few days later, the Group of 7 confirmed its support for the net zero goal, “by 2050 at the latest”. Yet, less than a month later, the IEA bafflingly called on OPEC+ countries to increase oil output to avoid an upward price shock as Brent crude prices – the international benchmark – hit three-year highs.
The resumption of economic growth around the world, as countries ease pandemic-related restrictions on business and travel, is driving global energy demand.
Global oil demand is now back at about 95 per cent of the pre-Covid-19 high of just over 100 million barrels a day in 2019, and is expected to be higher in 2022. Oil has been trading at over US$70 a barrel in recent weeks.
Falling inventories and the improved demand outlook have led market observers to suggest that oil priced at US$100 per barrel by the end of the year is entirely possible.
In the long term, the green policies pushed by the US and Europe to reduce investments in fossil fuels will increase the market share of Middle Eastern and Russian oil and gas producers such as Saudi Aramco, Abu Dhabi National Oil Company (ADNOC) and Rosneft.
Given the combined government and shareholder pressure on international oil companies – including Exxon, Chevron and BP – to reduce greenhouse gas emissions, the national oil companies of the Middle East and Russia will gladly step in to fill the supply gap.
Last month, both Exxon and Chevron lost key shareholder votes as pressure mounted on them to cut emissions.
The national oil companies in the oil-producers’ cartel OPEC+ face no such pressure. Their government owners require them to maximise the value of their assets in the national interest.
As the international oil companies shrink, national producers will welcome the opportunity to increase their global market share. Demand for fossil fuels shows no sign of slowing and will continue to rise for decades as developing countries seek rapid growth to meet the aspirations of their citizens.
This view was perhaps best articulated by India’s power minister, Raj Kumar Singh. He described the “net zero” mantra pushed by the developed world as “pie in the sky”, and also unfair.
He pointed out that in the developing world, “you have 800 million people who don’t have access to electricity.
“You can’t say that they have to go to net zero, they have the right to develop, they want to build skyscrapers and have a higher standard of living, you can’t stop it.”
The Opec+ producers are well aware of the need for fossil fuels outside the developed West.
Both Saudi Aramco and ADNOC plan to significantly increase their production capacity, while Qatar has committed to spending billions of dollars to expand liquefied natural gas by 50 per cent.
Russia’s Rosneft has started investing in an Arctic oil megaproject, which is expected to cost US$170 billion over a decade and will employ 400,000 workers, create 15 new industrial towns and build 800km of new pipeline.
Russia also plans to massively increase its coal production, modernise its railways and double its coal exports over the next 15 years.
There has been much debate about the energy transition in the Middle East recently. It is clear that oil and gas, and energy-intensive sectors such as aluminium and petrochemicals in the region, remain highly profitable. They are likely to remain so in the coming decades.
A premature exit from oil and gas and their derivative industries will deprive governments of export revenues and is unrealistic.
The Middle East producers must hope that the rich member countries of the IEA continue on their net-zero path, thereby putting the international oil corporations out of business.
The rest of the world is growing fast enough to keep the oil producers in the Middle East, Russia, Africa and elsewhere in the money for at least the next few decades.
Dr Tilak K. Doshi is a visiting senior research fellow at the Middle East Institute, National University of Singapore. This article solely reflects the views of the author