Yesterday, the oil-producers cartel OPEC—which is now somewhat cheekily called “OPEC+,” because Russia joined in 2016—failed to reach an agreement on increasing oil production. Stick with me for a second, because this may not seem like it has much to do with climate change, but in fact it reveals how decarbonization is already shifting how money is spent and how geopolitical power is exercised.
In the past month or so—as the pandemic has receded in the rich world, and as people have resumed commuting, road-tripping, and flying again—oil demand has significantly increased. Oil production has not: OPEC countries, which produce about 40 percent of the world’s oil, slashed their drilling last year and have not yet brought it back to pre-pandemic levels. As might be expected, this supply-demand imbalance has increased the price of oil: In the international market, a barrel of oil cost about $48 at the start of the year, but $75 on July 1.
The point of last week’s OPEC+ meeting was to right this imbalance, to open the taps and lower the price of oil. Yesterday, every member state agreed that oil production should increase. But they did not agree on how much. Nearly every country in OPEC+ agreed to increase production by a net 400,000 barrels a day. But one country, the United Arab Emirates, dissented: It wanted to pump even more. Because OPEC+ works by consensus, the proposed increase did not go through. The price of oil immediately rose worldwide.
There are two questions here. The first is: Why do OPEC countries want to make oil cheaper? They sell the stuff, after all. But as the historian Gregory Brew wrote last week, Saudi Arabia and other OPEC+ members are after the “perfect” price. They want oil to be cheap enough that demand for it keeps growing, which means that it must be price-competitive with other energy sources, such as renewables. But they also need oil to be expensive enough that it can continue to provide much of their government revenues.
The second—and more interesting question—is: Why did the UAE want to pump even more oil? The answer lies, in part, in the minutiae of how OPEC+ works. Its countries are, in theory, only ever allowed to pump to meet their “baseline” level of production. The UAE’s baseline is 3.2 million barrels a day. But the UAE says it can now pump much more than that, up to 3.8 million barrels a day.
Yet the answer to the UAE’s challenge also lies with climate change—and the revolution in how energy is produced worldwide. In the rich world, oil is predominantly used for moving people and things in cars, trucks, buses, ships, and planes. In the United States, transportation generates more greenhouse-gas pollution than any other sector of the economy. As oil-producing states confront a world where more transportation is zero-carbon—either because consumers are buying electric cars, or because companies such as Amazon are operating electric delivery vehicles—they’re confronting a world with less oil demand. That means OPEC won’t be able to sell as much oil in the future, and it’ll have to price it more cheaply.
You can see this future, I think, in the UAE’s actions. It expects to get less for its oil reserves in the future, when the world has more climate policy and when zero-carbon energy is even cheaper, so it is trying to maximize the value of those reserves now—even if that means lowering the global price of oil. In a way, climate policy is shifting oil consumption forward in time, forcing countries to drill oil today that they once would have planned to drill next decade. This mechanism could eventually lower the global price of oil. It means that decarbonization might have a nasty accelerating logic: As green energy gets cheaper, oil companies could try to pump even more, so as to flood the world with cheap oil.
In the immediate term, though, it’s not clear that such a process is in play. If the price of oil keeps rising, American fracking companies could increase their production. OPEC+ countries, and especially Russia, don’t want to see that happen, and it could prompt them to relent to the UAE’s demands. High oil prices could also backfire, pushing companies and consumers to buy EVs and move away from fossil fuels even faster than they are planning today. Or, on the other end, the UAE or other OPEC+ member states could go rogue and decide to increase the amount of oil they’re pumping without consulting their allies. Such a decision, if carried to the extreme, could lead to the collapse of OPEC.
It feels odd to write about oil purely through an economic-financial lens, when fossil fuels are the authors and finishers of climate change, the ongoing global environmental upheaval that is incinerating forests, raising ocean levels, and broiling people in their homes. But this international maneuvering, I think, reveals how decarbonization is no longer purely hypothetical, even in the most realpolitik-driven corners of geopolitics. Oil companies and oil-producing states are both planning for the energy transition and trying to shape the terms under which it happens. If we want to make the transition happen faster, we should understand their motives.
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