What happens to oil producing countries when oil demand peaks? When petro-economies no longer are able to finance themselves through the extraction and export of oil products, what do they do?
The concept of “peak oil” has been around for as long as oil extraction. The debate used to be about what happened when the world ran out of reserves of oil; around the start of this century the debate moved to what happened when the world ran out of economically viable exploitable reserves (and the two concepts are absolutely not the same). And as the reality of climate change has properly started to bite, the debate is now around what happens when the demand for oil is so stultified by the development of renewable resources like wind or solar, that no-one wants to buy oil any more.
So we have moved from availability, to economic availability, to demand. In many respects, it is the demand drop which is the true “peak oil” – for if there is no demand, oil production simply becomes unviable.
The key driver here is the climate crisis. The recognition of its potential depth, and of the changes needed to maintain the Intergovernmental Panel on Climate Change’s long term temperature limits (1.5 degrees C to 2 degrees C), have broken through into national and international politics. In the UK, a ban on new petrol and diesel cars will come into force in 2030. The EU aims to be climate neutral by 2050. President-elect Biden’s Climate Plan aims for a 100% clean energy economy by no later than 2050. China aims for carbon neutrality by 2060.
Political action goes in lock step with changes in commercial behaviour. Perhaps most striking is BP’s announcement in February 2020 that it would become “a net zero company by 2050 or sooner”. Funds are disposing of their oil assets – most astonishingly, perhaps, was the decision by Norway’s sovereign wealth fund, built almost entirely on oil revenues, to dispose of $5.9 billion of oil stocks in October 2019 as part of its programme to ultimately divest itself of all its oil holdings. The Church of England voted in 2017 to begin divesting from oil and gas companies that are not taking their responsibilities seriously and sold £8.4 million shares in July 2020. If further illustration was needed, the former Governor of the Bank of England, Mark Carney, has become the United Nations special envoy for climate change and finance.
Rystad Energy’s November 2020 projection gives perhaps the most up to date analysis. Oil demand will peak, they say, in 2028, at a level of 102 million barrels per day, falling to 62 million barrels per day in 2050. Whilst they add in the effects of the coronavirus – and anyone who lives in a city under lockdown will have experienced the wonderful clearing of the air – demand drop is mainly from the move to renewables.
And here is our first major point. Peak oil is not no oil. Peak oil is simply the peak of oil demand, and demand will fall from that peak, not stop. And other fossil fuels, particularly coal in China and natural gas in Europe, are not easily replaced at speed. Indeed, the European view of natural gas as a cleaner transition fuel between full fossil fuels and full renewables may have the effect of delaying the energy transition in Europe unless carefully managed.
As oil demand falls, oil prices will also fall; so producing countries are faced with a double bind. Saudi Arabia, for instance, needs oil to be sold at $80 a barrel to balance its budget; Russia needs $40. Russia could withstand oil prices of $25-$30 per barrel for 6-10 years. Riyadh, meanwhile, can afford oil at $30 a barrel, but would have to compensate with selling more crude. And these prices assume that they are still selling the same amount of oil. Which – as we have seen – they won’t. Oil demand will fall; oil output will fall; oil prices will fall.
Where will this hit the hardest? Oil dominant economies include Russia (compensated for in some small way by natural gas); Saudi Arabia and other Gulf States; Iran and Iraq; Nigeria; Venezuela; and since the fracking boom, the United States. (The UK has oil reserves but no longer to an economically significant degree; Norway is cushioned by having the largest sovereign wealth fund globally, now diversified into owning the equivalent of 1.5% of every listed company in the world. They can cope).
Oil revenues are used by governments to balance their books, especially when they have little other “real” economic activity; subsidise their population whether by explicit payments or by subsidising food, energy costs and the like; and by engaging overseas. Corruption, inevitably and always, swallows a large amount of the available cash. What, then, happens when that money runs out? Some possibilities:
- Russia: prolonged and tight austerity measures; whilst the defence budget is protected, all other state budgets are cut.
- Saudi Arabia: austerity; perhaps a cutback in support of overseas activities such as funding madrasas; a strengthening of regional alliances
- Iraq: there is little Iraq can do to replace oil revenues, which it urgently needs to continue rebuilding.
- Iran: has learned from years of sanctions regimes. It is used to not selling oil, and whilst it would find it hard, of all the oil producing states, it is probably most capable of living without it.
- United States: will have to learn to wean itself off oil, and fast. The new administration seems to understand this. Potential loss of influence overseas simply because available funds are needed at home.
- Nigeria and Venezuela would be in urgent danger of state failure.
It is not difficult to see what the social impacts would be: unrest within, possibly overflowing to violence. As they run out of money, though, their ability to impinge on their neighbours’ interests will diminish – geopolitical chokepoints such as the Persian Gulf and the Malacca Straits would diminish in importance.
Those states with no other assets, such as Saudi Arabia, would have to reposition at some speed; those with some other assets (such as Russia) would have time to transition, provided they were not overtaken by societal disruptions beforehand. Iran, rich in other resources and essentially capable of self-sufficiency, would adapt.
There are, though, some real winners as oil becomes less important. Renewable energy production needs the sun, the wind or the waves. Sun rich states will be energy exporters, wind- and wave-rich could benefit hugely. Provided the distribution systems can be put in place, states to the north and south of the Sahara could become solar superpowers. And if we get it right, Britain could be one too.
But let’s not be too optimistic. There is another resource curse just around the corner. Electricity generation from renewables, as well as transmission and storage, needs copper, graphite, lithium and rare earths. It so happens that many of these are concentrated in places with poor governance structures. Chile has the largest reserves of lithium; rare earths are in China, Russia and Brazil.
As petro-economies diminish, the world’s next flash points are going to be in the unstable rare earth economies: Bolivia, Columbia, Mongolia and the Democratic Republic of the Congo. Geopolitical impacts of peak oil stretch far beyond the oil fields.
Written by Jonathan Blanchard Smith, SAMI Fellow and Director
The views expressed are those of the author(s) and not necessarily of SAMI Consulting.
SAMI Consulting was founded in 1989 by Shell and St Andrews University. They have undertaken scenario planning projects for a wide range of UK and international organisations. Their core skill is providing the link between futures research and strategy.
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