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.
Author
Adi Imsirovic
Fellow in Energy Economics, University of Surrey
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 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 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 of restricting global warming to 1.5°C. But by , 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 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 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, of all new car sales are currently electric, while and are considerably further behind.
Brent crude oil price, 2000-24
This coming shift has serious consequences for oil prices, since about is used for transportation (most of it in ).
Mass EV adoption should weaken oil demand, thereby making it cheaper, but the price path is unlikely to be stable or linear. If investors think prices will fall, and that governments may become increasingly obstructive about new oil projects, it will become harder to finance them. This may well lead to supply shortages, which could temporarily drive up prices.
At the same time, we have to assume that carbon emissions will be taxed properly in future (currently, of global emissions are subject to some form of price on carbon, while fossil fuels receive in annual government subsidies). This, too, should result in more expensive oil – indeed, expectations around carbon taxes will be the key variable in determining what happens to prices.
If oil prices become more volatile, this may well accelerate the move away from oil. It may also help to drive uptake of EVs. In California, which has the of EVs in the US, demand for these vehicles has already to forecourt prices.
This does not bode well for oil producers, especially if they are subject to carbon taxes. Interestingly, among the least-affected producers will be and the United Arab Emirates (UAE), who together produce of all world oil.
Their oil production is among the 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 (currently producers are exempt from the CBAM, but this is likely to change in future).
Even so, Saudi and the UAE are still trying to reduce their overall carbon emissions by their economies away 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 (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, 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.
Adi Imsirovic is a Senior Associate (Non-resident), Energy Security and Climate Change Program
