Why We Can't Afford To Turn Our Backs On Fossil Fuels

When President Biden served the death blow to the Keystone XL pipeline this January, environmentalists rejoiced. Canadian oil exports to the United States, however, did not decline. What those rejoicing about the cancellation of Keystone XL were forgetting is something that many people seem to forget: it's not the supply of oil that is the problem.

It's the demand. The International Energy Agency raised hackles earlier this year when it released its Roadmap to Net-Zero. Some called the roadmap a bombshell. Others dismissed it as impossible. Saudi Arabia referred to it as a sequel to La La Land. This Roadmap to Net Zero called for an immediate suspension of new oil and gas exploration.

"No new oil and natural gas fields are needed in the net-zero pathway, and supplies become increasingly concentrated in a small number of low-cost producers," the agency wrote in the roadmap. The premise appears to be that no more oil and gas will be needed because there will be no demand for them. The reality, however, is different.

Last year, at the height of the pandemic crisis, some in the oil industry said we were already beyond peak oil demand. None other than BP predicted that oil demand will never return to pre-pandemic levels. Now, none other than that same IEA that called for the suspension of new oil and gas exploration is calling on OPEC+ to boost their output because demand for fuels was shattering all expectations. It is also forecasting oil demand next year to not just return to but exceed pre-pandemic levels.

Related: The Next Major Wildcard For Oil

All this points to something that planners at IEA and Brussels may or may not think about but is nevertheless real: limiting the supply of a commodity will not automatically lead to a decline in the demand for that commodity. It is the demand side of the equation that needs to be targeted if you want to reduce supply, in this case, in order to reduce global carbon emissions. Yet this is unusually tricky.

Reuters reported earlier this month that "Governments around the world have been slow to make uncomfortable decisions to persuade consumers to cut energy consumption to help achieve climate targets, often because consumers are not ready to pay up or compromise their lifestyles."

In fact, governments seem to be avoiding the topic of reducing energy consumption altogether precisely because any decisions that need to be made in this respect are "uncomfortable," as Reuters puts it, or, to put it more bluntly, will cost politicians votes. This is a problem, and delaying it won't lead to a self-solution.

The bigger problem, in the context of the Paris Agreement targets, is that unless the issue of energy demand is addressed, these targets will become even harder to hit. An even bigger problem is that even if governments try to address the demand issue, there is no guarantee they will be successful in reaching an agreement with the public to reduce demand.

Switzerland is a recent case in point. The government of one of the wealthiest countries in Europe proposed a law to help the country meet Paris Agreement emission targets. The proposal involved a surcharge on car fuel and a tax on air travel. It was rejected at a national referendum, although in all fairness, it was a slim majority that rejected it, at 51.6 percent. Still, it was a majority.

What the Swiss case suggests is that even in wealthy countries, people are not all that willing to change their lifestyle-or pay more money-in order to reduce emissions. As a side note, the poverty rate in Switzerland has risen to 8.7 percent recently, so wealthy does not necessarily mean "everyone is rich and can afford an EV". Related: U.S. Gasoline Demand In 2021 May Have Peaked Already 

When it comes to poorer countries, the problem becomes even more challenging. India's Environment Secretary earlier this month put it bluntly: rich countries must help poor countries foot the emission reduction bill.

"Every policy decision has a cost to the economy. Going net-zero or using less carbon also has a cost," Rameshwar Prasad Gupta told Bloomberg in an interview. "We are not anti-net-zero. But without adequate climate finance being definitively available, we can't commit on that part."

Now, imagine how the less fortunate citizens of rich countries would react to news their governments have agreed to help pay for another country's energy transition. This would effectively mean those same citizens would be paying for both theirs and someone else's emissions reduction. This isn't something likely to sit well with taxpayers anywhere, even in the greenest of European countries.

The situation, then, appears to be an impasse, and it may become chronic, with little possibility to date for governments to relax their emission-relates targets. If anything, they are tightening them, making it even harder to sell the energy transition to people.

"We see a widening gap between rhetoric and what is happening in real life," the IEA's Fatih Birol said earlier this month. "So many governments are coming with net-zero targets by 2050 and the same year CO2 emissions are growing and it will be the second-largest increase in history.

"Consumer behavior needs to change as a result of government steps."

Such a change could only be effected in one of two ways: slowly and gradually, or quickly and forcibly. Based on targets being set by the energy transition ideologues, slowly and gradually is not an option. The quick and forcible way, however, is fraught with the danger of revolts and toppled governments. All one could tell these emission-conscious governments, then, is good luck with the transition.

By Irina Slav for Oilprice.com

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