Climate Strategy in Saudi Arabia: More Crude, Less Combustion
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The threat that climate action poses to hydrocarbon rents is bringing about two policy shifts in producer countries. First, national leaders are finally getting serious about diversifying economies into non-oil enterprises, despite comparatively lacklustre prospects for profitability and rents. Second, policymakers are simultaneously protecting and enhancing the competitiveness of state-owned oil industries.
The two strategies appear compatible. Diversification has been among the perennial recommendations of multilateral institutions. The urgency is heightened by climate policy and the possibility of long-term reduction in oil rents’ contribution to the state’s fiscal revenue. Diversification may be unattractive to a low-cost oil producer, but it is more attractive than standing by as the economic mainstay of the state is whittled away. The second strategy—the subject of this article—has policymakers taking steps to protect the flow of oil and gas rents from climate action, by seeking ways to preserve market share for oil in general and by creating preferences for national supplies of crude oil as differentiated from grades produced by other countries.
In the past, low-cost oil producers like Saudi Arabia responded to international climate negotiations in ways that ranged from noncommittal to obstructionist. Recently, Saudi Arabia has adopted a more nuanced and sophisticated climate strategy, driven in part by national oil company Saudi Aramco, which has played a leading role in the kingdom’s approach to climate change. Several Aramco employees are on the Saudi climate negotiating team, which is under the control of the Ministry of Energy, Industry, and Mineral Resources. One member is an acknowledged author of the 2018 Intergovernmental Panel on Climate Change report. Deep involvement in global climate policy may have helped Aramco design a strategy that could preserve its role, and that of crude oil, in a future global economy beset by restrictions on fossil fuels.
Some of the strategies that Saudi Arabia has developed alter the nature of its future participation in the oil business. From simply supplying crude oil, the kingdom is increasing its involvement in refined oil and gas products, as well as in import markets and oil-consuming technology. Three of these strategies are discussed below.
Published in Oxford Energy Forum.