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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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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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Leave a comment
  • Alan Dr on July 20 2021 said:
    When it concerns oil, about 70% of its use is for transportation. Most demand growth is directly related to the growing amount of cars in the world.

    Many seem to think that electric cars first have to sell more then combustion cars in order to affect demand growth for oil in this sector.

    The reality is that for every hundred ICE (internal combustion) cars there are sold, 75 replace old ICE cars that are scrapped and only 25 are actually added to the new total of cars.
    Electric cars only need to reach this number and all demand growth for oil in this sector is over.

    If we look at the growth of electric cars in the last 8 years, we see a yearly growth percentage of more then 40% or almost a doubling every 2 years. Sales in Europe have reached 15% when the last numbers where presented and China is reaching 10%. The world total percentage has reached 6.6 percent and will reach this year a total of more then 4.5 million electric cars sold.

    Technology expert Sandy Munro from Munro and associates, who is taking all new electric car models apart to study the technological development but also to study their construction cost development, has lowered his prediction that EV’s will exceed ICE sales in 2028 instead of 2030.

    If oil business is your bread and butter it is important to hear what this specialist has to say, based on what he can show you. (There are some nice videos he makes to actually also show the development in EV construction and it’s cost reductions over time)
  • Weston Quentin on July 20 2021 said:
    As long as demand, supply will find a route and find a way. All they did was push oil price up.
  • Mamdouh Salameh on July 20 2021 said:
    The simple straight answer is that there is a growing demand for fossil fuels and that renewables on their own aren’t capable of satisfying global energy demand because of their intermittent nature. Moreover, global energy transition won’t succeed without major contributions from both natural gas and nuclear energy. Furthermore, the global economy will come to an immediate standstill without oil.

    Neither courtrooms nor boardrooms or the IEA’s la-la-land net-zero emissions roadmap could force the global oil industry to change its direction as long as there is global demand for oil.

    If this is the case, then why don’t we stop this nonsensical talk about ditching oil and natural gas and focus instead on reducing the emissions occurring during the production of oil and gas.

    Why don’t the militant activists and divestment campaigners drop the harassment and litigation against the producers of fossil fuels since such litigation is based upon a false premise: that it is fossil-fuel producers who should be held responsible for the effects of increasing atmospheric concentrations of greenhouse gases (GHG).

    Producers produce fossil fuels not for the fun of it but obviously because there is a huge consumer demand for reliable, affordable energy.

    In other words, consumer demands are the ‘raison d’être’ of any industry. If that is the case, then why climate litigation is overwhelmingly directed at the fossil-fuel producers when it is consumers who demand and consume fossil fuels.

    So why have the courts in the United States, the Netherlands and elsewhere failed to go after consumers of fossil fuels for the purported “harm” that their consumption preferences engenders.

    Still the courts are happy to blame fossil-fuel producers for all that “damage” despite the fact that agriculture and cement production and a myriad other processes emit far more GHG than those attributable narrowly to the use of fossil fuels. Assigning “blame” to the producers of fossil fuels rather than the users is an obvious gambit to make the litigation game manageable; they cannot sue everyone. What a hypocrisy?

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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