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The simultaneous collapse of oil production and social stability in Venezuela has provided a vivid preview of a potential pathway for oil-export states deprived of hydrocarbon rents to fund their national budgets.
While Venezuela’s predicament is based on domestic policymaking, some observers suspect that climate action could provoke similar results, leaving oil exporting states with insufficient revenues to maintain public order.
The notion of an encroaching threat to hydrocarbon demand and rents—as opposed to the debunked “peak oil supply” conundrum of the past decade—is leading policymakers to reassess long term assumptions about the oil business in two ways: by promoting diversification into alternate businesses, and by protecting and enhancing the competitiveness of their oil industries.
The two strategies appear compatible. The first prepares the economic landscape for a day when oil rents no longer dominate the state’s fiscal revenue, whether from a plateauing of global oil demand or any other reason. The second seeks to insulate flows of oil and gas rents against the more direct challenges emanating from climate policy.
Saudi Arabia, the global oil market’s largest supplier, has taken steps in both directions. Its initiatives toward diversification are well known and covered elsewhere. This paper looks at the other, less explored climate strategy: near-term actions that the kingdom and other producer states have taken or may take in the next few years to maintain the continuity of oil exports amid the emergence of restrictions on fossil fuels.
Some of the strategies that Saudi Arabia has developed would alter the nature of its future participation in the oil business. From simply supplying energy commodities, the kingdom is increasing its involvement in importing markets and in bolstering oil-consuming technology.
One strategy involves infrastructure and investment ties with developing states where expectations for growth in oil demand are high. A related effort emphasizes low-emission and non-combustion uses for crude oil, which are consistent with a transitioning energy system. Another has the kingdom increasing its cooperation with the global climate regime, pursuing a commitment to energy efficiency which does double duty in domestic oil demand management. Yet another strategy seeks to lobby the international community to moderate its targets for greenhouse gas emissions, and accept a higher level of human climate damage.
While this paper applies these strategies to Saudi Arabia, other producer countries should be expected to take similar steps. The realization that the world is over-endowed with hydrocarbon reserves that may never be produced is forcing a strategic alteration in oil market behavior. Oil and gas markets appear likely to grow more competitive, with producer states vying for market share and differentiating products based on environmental criteria.
What this portends for markets and demand over the longer term is unclear. One envisions the eventual emergence of multiple potential pathways. A cooperative path would see producers collude to manage reductions in production so that prices remain above their cost of extracting the marginal barrel. One can also imagine the emergence of a more hostile dynamic pitting fossil fuel producers against the efforts of climate-focused states and international organizations. Another possibility would see a “green paradox” path arise, with low-cost producers maintaining or even ramping up production, driving down oil prices and helping fossil fuels compete against alternatives.
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