Calls for an end to all investment in new oil and gas production, protests demanding the immediate suspension of oil production, and whistleblower reports from environmental NGOs accusing banks of continuing to finance fossil fuels have become essentials of today’s life in the West. But fossil fuels aren’t going anywhere, at least in the observable future.
“The idea that we can turn off the taps and end fossil fuels tomorrow, that’s obviously ridiculous and naive,” Standard Chartered chief executive Bill Winters told CNBC in an interview this week. “Well, first of all it’s not going to happen and secondly it would be very disruptive.”
Why this won’t happen should be obvious and can be gleaned from a quick glance at any oil price chart. Global demand for oil is currently greater than available supply; so the prices are high. What followed the loss of only a relatively small part of the world’s supply with the anti-Russian sanctions should suggest what would happen if all oil production were to stop.
Yet the pressure on the oil industry remains and intensifies. Two years ago the International Energy Agency said that investment in new oil and gas exploration should be phased out by the end of 2020 because we wouldn’t need more oil and gas in the future. And now the Secretary General of the United Nations is call oil-producing countries “dangerous radicals” to increase the production of fossil fuels.
The IEA, for its part, has reversed its calls for less investment in oil and gas. In just a few months, the industry body has reversed its message: it is now calling on oil producers to produce more oil and gas. How long will it be before the UN’s Antonio Guterres joins these calls for more oil and gas because prices have become unbearable?
Meanwhile, demand for oil remains robust despite environmental protests, despite whistleblower reports and despite calls for less investment in oil and gas. In its March oil market report, the IEA said oil demand in 2022 would increase by 2.1 million bpd since last year. This, for context, is about the same as the combined oil production of Nigeria and Venezuela in March this year, according to the latest Oil Market Monthly Report of OPEC.
Yet demand for oil is not static, and this month the International Energy Agency downgraded its demand forecast to 1.9 million bpd since last year. This is about the same as the combined production of Libya and Algeria. OPEC also lowered its demand forecast, although it still expects demand growth to be stronger than the IEA, at 3.7 million bpd.
The reason for the revisions is not the action of climate NGOs and the EU government’s shift from oil to renewables. On the contrary, the reason for the revisions has nothing to do with climate-related issues. Instead, it has to do with inflation projections.
The demand for crude oil is a fairly inelastic demand. What is that means is that this demand is rather stable even when prices go up or down. The reason for this inelasticity is the world economy’s dependence on oil, a dependence that so many organizations and governments have tried to challenge for years with limited success.
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The sustainability of oil demand is also reinforced by the emerging debate on the need to make the energy transition fairer. A concept that had been glossed over as students demonstrated across Europe for urgent action on climate change, the idea of a just transition has finally started to gain attention.
The idea, as described by Greenpeace, is to “move to a more sustainable economy in a fair way for everyone, including people working in polluting industries”.
Indeed, proponents of the just transition focus on the most important aspect of the shift to less use of fossil fuels from the perspective of an individual: that no one suffers the negative consequences of this change.
Yet, beyond “people working in polluting industries”, the idea of a just transition also concerns entire nations of the developing world. Unlike proponents of climate change in the so-called first world, these nations have not had the chance to reap the full economic and social benefits of the oil-based economies that many believe have industrialized and even post-industrialized. precisely because of their generous use of fossil fuels.
The developed world, argue just transition advocates, has no right to deny these benefits to the developing world simply because it has reached a level where it has sufficient economic comfort to solve problems such as the effects of human activity on the environment.
It is this idea of a just transition that will help secure the future of fossil fuels for some time to come. For all the promotion of renewable energy as cheaper than fossil fuels, the fact is that the big rich economies have the most capacitywhile the poorest countries lag considerably behind, even in the EU.
Oil, however, is everywhere, even in the poorest countries. And it will stay there for decades.
By Irina Slav for Oilprice.com
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