‘Farewell, fossil fuels’? What oil’s demise will do to the world’s leading economies

A group of OPEC ministers is scheduled to meet — virtually — on Thursday to decide if the cartel’s output needs to be tweaked to cope with weak oil prices. But OPEC, once the ogre that scared Western industrialized economies, is a shadow of its former self. Founded 60 years ago this week, it no longer makes Page One headlines. Hardly surprisingly, its Joint Ministerial Monitoring Committee is likely to fudge its decision.

The current comparatively low prices, which slipped below the $40 per barrel mark last week, are partly a consequence of a concession made to Iraq when production cutbacks were agreed to for the May-July period and Baghdad was allowed to continue pumping, claiming financial need. The deal was that such overproduction would be compensated by Iraqi cutbacks in September.

Well, guess what? The “compensation period” is likely to be extended into October and November. Other things being equal (or “ceteris paribus,” in Latin), the price of oil looks likely to remain weak, although the Latin phrase implicitly warns that other factors will likely intrude. Arguably, a more significant factor is probably the hints from Riyadh that prompted last week’s Financial Times story, “Saudi Arabia to keep pumping despite fall in crude prices.”

But now there is an explosive new ingredient to start taking into account. On Monday, the oil world woke to the news that London-based energy giant BP is predicting that world oil demand could peak by the early 2020s. Previously, the accepted wisdom was that oil would remain the predominant fuel — over natural gas, coal, nuclear and renewables — well into the 2030s. “Green” consumer preferences forcing different political choices has been added to by the economic shift caused by the coronavirus. It is not quite time to say “Farewell, fossil fuels,” but it is the first draft of their obituary. 

Another factor coming into play is the thinking of Daniel Yergin, the oil guru whose book, “The New Map: Energy, Climate and the Clash of Nations,” was published today. The Weekend Wall Street Journal carried a quick-read (although still-detailed) version of the book, no doubt a weighty tome. In a feature article entitled, “The New Geopolitics of Energy,” Yergin points out that oil giants such as Russia and Saudi Arabia will find themselves in deep economic trouble unless they transform their economies quickly. Their particular problem is that they can’t transform them quickly enough — not even Saudi Arabia, despite the ambitions of its de facto leader, Crown Prince Mohammad bin Salman, and his “Vision 2030” plans.

The main beneficiary of the trend away from oil will be China, currently a significant importer. For it, moving toward electric cars will represent a significant saving in oil-import costs. Furthermore, China is the top producer in the world of lithium, a necessary material for manufacturing electric cars — so, another plus for the Chinese economy.

The United States is in danger of being caught in the middle. Another Trump administration likely will continue a policy of supporting the U.S. oil and natural gas industry; a Biden administration instead would emphasize a rapid shift in the direction of renewables. But, in the short term, any economic recovery in the post-coronavirus era, for which we are all hoping, will be a boost for oil and gas. That means U.S. shale but also Russian and Saudi exports.

In geopolitical terms, the strategic economic demise of Russia and Saudi Arabia will be delayed by “a decade or two.” Meanwhile, U.S. shale production probably will be struggling to find the new investment it constantly needs when the “smart” money is looking for returns in renewables. A headline in the Wall Street Journal on Sept. 14 captured the emerging new reality: “Exxon used to be America’s most valuable company. What happened?”

Simon Henderson is the Baker Fellow and director of the Bernstein Program on Gulf and Energy Policy at the Washington Institute for Near East Policy. Follow him on Twitter @shendersongulf.