August 2021

Oil and gas in the Capitals

Glasgow COP 26: An event among others?
Dr. Øystein Noreng / Contributing Editor

Unsurprisingly, the recently published report by the Intergovernmental Panel on Climate Change has gotten considerable media attention. In a wider context, it appears, however, as part of a series of events that highlight the climate issue without much effect on the energy business. The recent report is a summary for policymakers, conveniently in time for the November Glasgow COP-26 conference. The more thorough analytical documents will be released later, probably after this conference.

In hindsight, the various climate agreements have had little, if any measurable significance. The issue is the contribution of developing countries.

In 1997, the year of the Kyoto Agreement, the world emitted close to 23 billion tonnes of carbon dioxide, with OECD countries accounting for about 13 billion, the developing world for about 10 billion. At the time of 2009’s Copenhagen failure, world emissions had risen to almost 30 billion tonnes. The OECD figure was stable, but developing countries had increased their emissions to 17 billion tonnes. In 2015, the year of the Paris Climate Accord, the world emitted about 33 billion tonnes, including 20 billion in developing countries. After a roughly 6% worldwide emissions decline in 2020, to what extent will a rebounding world economy in 2021, the Glasgow year, reset emissions to 2019 levels? Meanwhile, the developing countries’ share is increasing.

The Kyoto Agreement had no real impact. The Paris Climate Accord after COP-21 was hailed as a success, because almost every country signed up, but the signatories decide their own commitments and the promises of financial compensation to developing countries have not been followed up. Especially for the latter reason, most developing countries are reluctant to make new commitments on climate and emissions; energy consumption per capita in developing counties—as a group—in 2019 was only about one-third of that of OECD countries. The Paris Climate Accord set a $100 billion/year target for transfers from rich to developing countries. The rich countries have failed to deliver, so the Paris Accord, for practical purposes, may be as dead as the Kyoto Agreement.

Developing countries, headed by China, give priority to economic growth over climate protection, following the rich countries’ example through the last century. South Africa’s energy minister wants developed countries to transfer $750 billion annually. Australia, Brazil, China, India, Russia, Saudi Arabia and South Africa, among others, have refused to renew their commitments for emission cuts. China opposes any revision of the Paris Accord text, protecting the provision to transfer funds. As of August 2021, signs are ominous for the outcome of COP-26. Preparations have been criticised as amateurish, but the key problems are world energy market realities and an unevenly distributed world economy.

Uncertain prospects for Glasgow throw a critical light on the International Energy Agency’s (IEA’s) report, NetZero Emissions by 2050: A Roadmap for the Global Energy Sector, NZE. The report has been prepared on the UK government’s initiative, ahead of the COP-26 climate summit in Glasgow during November 2021.

The need for heavy-handed intervention on both demand and supply suggests that alternatives are not readily available at acceptable costs. The default option is political engineering, with inherent risks.

The objective is rapid electrification of the world economy. Politicians are supposed to force users to switch to electricity and to use less energy. Energy-sector investment would multiply. Electricity and fuel prices should skyrocket, perhaps quadrupling. The argument is that the world should get richer by using less and far more expensive energy more efficiently. The concept is for 8 million workers in renewable energy to replace one million jobs in the oil and gas industry, delivering a smaller volume of energy. According to IEA, human labour should replace energy from nature. This reverses hundreds of years of history, as humans have increasingly used nature’s energy to free themselves from toil, not just in manual tasks.

The report apparently ignores the structural change in the world market, from Saudi Arabia, the major supplier, and the U.S., the major buyer. Today, it is increasingly dominated by China, the largest energy market and importer, and by oil exporters Saudi Arabia, Russia and Iraq, potentially also Iran and Venezuela, neither of which are interested in following ZNE proposals.

Instead, measures like what the ZNE report proposes will strengthen the interests of major oil exporters—whether in Africa, Latin America, the Middle East or Russia—to opt for the Chinese market. China has, for many years, by investment and trade, built commercial positions in oil-exporting countries, using its national oil companies that have become world champions. The ZNE report announces measures likely to propel leading oil exporters into China’s arms, favouring the Shanghai Futures Oil Exchange and oil trading in Chinese yuan at the expense of U.S. dollar oil trading. Oil is still the world’s most traded commodity, underpinning the U.S. dollar as the world currency. Therefore, the ZNE proposals potentially weaken the U.S. dollar-based monetary order, benefitting the yuan.

As the rich countries try to phase out fossil fuels before alternatives are amply available at acceptable cost, they leave the economic momentum to others. The world oil industry is no longer dominated by North America and Western Europe, but increasingly by companies based in China, Russia and Saudi Arabia. Demand for oil, and especially natural gas, is likely to grow further. 

About the Authors
Dr. Øystein Noreng
Contributing Editor
Dr. Øystein Noreng is a professor emeritus at BI Norwegian Business School. He has been an advisor or consultant to the International Monetary Fund; The World Bank; the governments of Canada, Denmark, Norway, Sweden and the U.S.; and energy companies, including Equinor, PDVSA and Saudi Aramco.
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