Oil prices are once more on the rise, after a pandemic and a price war sent them tumbling in 2020. We are in the midst of the new oil price super cycle, which has been driven by supply shortages from the lack of investments that has been ongoing since the 2014 collapse in oil prices, as well as by demand growth that has been triggered by global optimism about vaccines. Most of these elements are likely to lead to an increase in consumption, yet the looming green transition and the orientation towards different technologies makes the future of oil less certain.
The energy transition is having a significant impact on the Arab states of the Gulf, as they decide to move away from economic reliance on hydrocarbon exports. Hydrocarbons are the dominant components of crude oil and processed petroleum hydrocarbons, like gasoline and diesel. Saudi Arabia and the United Arab Emirates have emerged as the key regional players of this energy transition. The former has already formulated a plan of domestic reforms, all in line with the transition towards greener technologies so as to maintain its dominance over the energy sector. The latter is having a harder time designing a homogenous energy policy given the disagreements between the different emirates, notably Abu Dhabi and Dubai, but the key leadership position it occupies remains. The Arab Gulf region maintains a strong competitive advantage over other regions across the globe, given the plethora of natural reserves, which has been complemented by investments in greener technologies in the last decades.
The global transition to an energy system with lower carbon dioxide emissions will have an enormous impact across the globe. The broader shift away from liquids, such as oil and fuels, and towards natural gas and other sources of energy, such as nuclear energy, means that the international community is undergoing a massive transformation. For decades, the reliance on oil implied that national economies became inextricably linked to the movement of oil prices and their progress throughout the world economy system.
The safest and cleanest sources of energy coincidentally are also the ones that have the smallest impact on the climate considering death rates per unit of energy data and the greenhouse gas emissions (GHG) per energy unit, which considers the total carbon footprint over the full lifecycle. Due to the symmetry of the chart produced after analyzing the 5th report of the Intergovernmental Panel on Climate Change (IPCC), it is evident that the safer energy sources, like wind and solar power, are also the safest and least polluting ones, given the low death rates.
Even with lower oil prices, extraction and exploration companies have remained highly profitable, yet they have reduced their investments out of fear of a less stable future for the energy sector. Production in oil fields and the number of wells are declining and depletion of reserves is accelerating, given that the decrease in capital expenditure and oil reserve replacement has followed a steady path since 2014. The pandemic magnified the decrease in investment in the oil sector: shale oil output is increasing only by 0.5 million barrels a year, compared to 2 million barrels a year before the pandemic. The Biden Administration has also adopted a greener approach as far as the energy sector is concerned. It has announced a ban on drilling on federal land, which signals a shift in the attitudes of the federal government towards the oil industry.
Recent technological developments are pointing to the transformation of the energy sector more directly than the subtle policies that national governments are beginning to concentrate on. For example, the capitalization of Tesla, the electric carmaker, signals the transformation of the automobile market and widens the gap between those who can follow along in this transformation and those that will have to be left behind. The general sentiment of competition that has embraced the sector of energy has also triggered massive investments in research and development by companies that wish to enter the green industry more powerfully and ‘stay on top of their game’.
The Energy Transition Index (ETI) is a composite index that creates a threshold, according to which world economies can position themselves based on their efforts to achieve net-zero emissions and transform their economies according to greener standards. The systematic movement towards a more sustainable energy sector has been accelerated, especially a reduced reliance on imported energy, lower energy subsidies and strong political commitment to transform the energy sector in order to meet national and international targets. Sweden is ranked first in the list of countries undergoing such an energy transition, followed by Switzerland and Finland.
As the incorporation of electricity is becoming more visible, the complementing of green projects by uranium could also be a solution. As oil prices perform somersaults, nuclear energy becomes the solution for many who wish to secure their place in the world economy.
This has been the story of Iran, a nation that has followed developments in the energy sector very closely and has managed to adapt relatively well. Soon after the nationalization of the Iranian oil company in the 1950s, Iran has entered and exited the petroleum stage multiple times. It has turned from a peripheral actor, into a dominant player and into a leader within the span of decades. Nowadays, it has changed its status from a previously marginalized actor into a nation fully enmeshed in energy developments. The infamous nuclear energy sector has allowed Iran to gain an advantage compared to its Arab neighbors, but it has turned all international attention to its national political developments.
Although the word ‘Iran’ conjures up images of its uranium enrichment and nuclear plant development programs, and although its relationship with oil remains complex, the petroleum industry remains a key sector for the Iranian economy. The new government, led by Ebrahim Raisi, will take determined steps towards the redefining of Iranian domestic policy related to the energy industry and the petroleum sector. The greater emphasis on self-sufficiency and desire for less reliance on the rest of the Middle East and the West are two elements that have led to the acceleration of the crisis in the oil price sector and the hardening stance regarding nuclear deal negotiations. Iran serves as a case study in the greater context of green transitions. The recent oil price super cycle seems to be consistent with climate goals and related to commitments by large economies to achieve net-zero carbon emissions in the near future. Despite this climate-friendly approach, a sudden departure from the realm of oil will have immediate consequences for petroleum-reliant economies, leading to the emergence of more crises and further highlighting the existing instability. Oil-dependent economies in the Middle East, central Asia and Latin America are important sources of employment and external demand for goods, and any disruption in the ‘business as usual’ mentality will have international implications.
This is why a progressive and systematic transformation needs to take place. Oil-dependent countries need to diversify and incorporate tools in their decision making that help them become resilient to changes, not only in the market, but also in the political and societal framework. The introduction of renewable energy in these countries’ immediate line of sight will be imperative for the survival of their economies. Changing attitudes towards innovation, by reforming national and local governance systems as well as promoting markets without barriers to entry or exit will be key elements in the green transition.
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Originally written for Tra I Leoni at https://traileoni.it/2021/09/towards-a-greener-transformation-the-challenge-of-ending-oil-dependency/