Petro-Swan Song? The Race to Produce what’s Left
Martha Molfetas on petrostates' dual existential crises.
After a long stint of low oil prices, regional conflict in the Middle East is increasing the price of oil to finally meet breakeven prices—the price oil producing nations need to benefit from their resource wealth. But even before Israel’s war with Gaza spread into Lebanon; oil producing nations announced a plan to dramatically increase the supply of oil, knowing that this would in turn lower prices below breakeven requirements. Right now, the world is in the midst of an energy transition away from fossil fuels and towards renewable energy alternatives. It’s in the interest of petrostates to diversify their economies for long term resiliency rather than rely on volatility for their own short term economic survival.
But what makes sense is often not what happens. As another climate conference is on the horizon next month—the second such conference to be hosted by a petroleum reliant nation—there is buzz around petroleum interest push back. The transition towards renewables will redefine the global economic order, shifting the balance away from fossil fuels towards renewables. Petroleum producing nations and companies are unlikely to go quietly into the night, even if it’s in their own self interest to diversify and chart a climate-forward path.
It now goes without saying, the sources of energy we use will make or break climate goals and the energy transition underway. The last climate conference in Dubai, COP28, sent a clear signal to phase out fossil fuels and achieve net zero emissions. To achieve those goals will require changing the energy sources we will all rely on. Businesses and nations in the business of providing petroleum today will become less important in a renewable future. They will also suffer financial losses. Even amid the suspended uncertainty of conflicts over the last year, oil prices remained low compared to the average breakeven price $77 per barrel, this is the price required to cover the cost of production and provide profits that can in turn benefit national coffers.
For much of the last few months, the price for a barrel of crude oil hovered around $68 per barrel. Now that regional conflict is spreading across the Middle East, the price of oil is now surging, hovering between $74-78 per barrel. A planned influx of oil on the market will make oil prices drop even further as supplies exceed demand, even with regional conflict spreading. Lower prices could help oil stay competitive against cheaper renewables, but in the end lower oil prices will not contribute as much to national revenues for oil producing nations. This is a race to produce what’s left.
Climate is an energy challenge, in its cause and in its solution. Fossil fuels alone have directly contributed towards 75% of all emissions, ever. Most nations in the Organization of Petroleum Exporting Nations, or OPEC, are reliant on oil and gas for a sizable slice of their national revenues. From 1970-2019, oil and gas contributed towards roughly 25% of national revenues for OPEC nations on average; many rely on oil for an even larger slice of the revenue pie. An energy transitioned world could make the United Arab Emirates, Angola, and some other petrostates lose up to half their national revenues. This means as the world drifts away from fossil fuels, petrostates face a reality where they will have diminished financial resources. In fact, it’s estimated that demand for petroleum will peak sometime in 2028 and decline thereafter as electric vehicles boom in demand. Those losses could impact the ability of petrostates to provide basic social services to their citizens, like roads, healthcare, schools, or coping with climate-fuelled events.
Petrostates are not excluded from climate impacts. Increased heat intensity and water insecurities are becoming more prevalent in the Middle East and elsewhere, and will amplify as the world breaches 1.5°C of warming. This year, Dubai reached a record breaking heat index of 60°C.
New livelihood insecurities are propelled by climate change. In turn, climate change is fuelled by dependence on fossil fuels. In the end, oil will need to stay in the ground. The International Energy Agency has reported that for net zero targets to be fulfilled by 2050 and for humanity to have a habitable future, there can be no new fossil fuel development. This means petrostates will need to diversify and alter the present course. Instead, we are witnessing a doubling down on fossil fuels, even if it means lower oil prices, more climate impacts, and lower national revenues.
With the energy transition on the horizon and the likelihood that oil could peak by or before 2030, petroleum dependent states should start to heavily diversify to limit economic shocks. Saudi Arabia has made recent strides to invest more in renewables and other alternatives to oil, committing 73% of their $1 trillion capex fund towards non-oil sectors, including renewable energy. If the world’s second largest oil producer can plan for a greener future, what is stopping the rest?
Petrostates face dual existential crises. On the one hand, they are among those impacted by a climate-fuelled future. On the other, their national economies require continued exploration and production of fossil fuels. One need supersedes the other, but which one will win out in the end is anybody’s guess. In the end, petrostates are not very different from other nations—they can choose to face the climate crisis head on, diversify their economies, invest in renewables, and help achieve global climate goals in a measured way. Or they could be forced to do so in the sea of new insecurities a 2°C+ world will create, where they will have no choice but to adapt.
Martha Molfetas is a Senior Fellow, Planetary Politics, at New America - working on just energy transition; and a Visiting Assistant Professor at Pratt Institute’s Graduate Center for Planning and the Environment; where she teaches Environmental Economics. Martha is a senior climate and energy policy consultant, writer, and strategist with over 15-years of experience helping NGOs, think tanks, and businesses unpack climate, environmental justice, resource conflict, sustainable development, and global policy issues.
Photo by Life Of Pix
