Nordine Ait-Laoussine, Switzerland; John Gault, Switzerland - Feb 22, 2022

The world’s largest importers of oil and gas and the world’s largest exporters do not see eye-to-eye. The importers — who until now are setting the pace in the global climate debate — insist on accelerating the transition away from fossil fuels. The oil and gas exporting countries must respond to the challenge of the energy transition, while delaying as long as possible the prospect of stranded assets. Failure of each to recognize the other’s concerns is already creating unmanageable problems for both. We believe collaboration between the two would yield a better path forward for everyone.

Importing countries, including the largest emitters of carbon dioxide, are insisting that all nations make ever more ambitious commitments to emissions reductions. At COP26 in Glasgow last November, a US-China joint statement noted the significant gap between national pledges announced to date and what will be needed to achieve the goals of the Paris Agreement. The US and China urged “closing that gap as soon as possible, particularly through stepped-up efforts.”

On behalf of the exporting countries, Opec has participated in UN climate change conferences for decades, drawing attention to the problems facing resource-export-dependent economies and low-income nations needing fossil fuels for development. Implying that Opec’s past advocacy has insufficiently influenced the global debate, the organization’s secretary-general-elect recently announced his intention to seek “a bigger role, a bigger say, bigger participation and more visibility in this dialogue ... a more proactive role.”

Recent Opec-plus actions reflect this more energetic stance and reveal — explicitly or implicitly — the group’s endgame strategy:

First, maintain the highest-possible revenue stream as long as feasible in order to postpone the pain of transition and pay for investments in economic diversification. This wealth transfer away from oil-importing nations simultaneously reduces importers’ financial capacity to invest in their own energy diversification.

Second, ignore the impact of high oil prices on oil consumers, and also the pleas of US President Joe Biden and others to expand supply enough to soften prices. Concern over thinning Opec spare capacity was not even raised at the Opec-plus meeting on Feb. 2.

Third, ignore the impact of oil prices on broader global inflation and the impediment inflation may represent for clean energy investments in oil-importing countries.

Fourth, ignore the risk that high oil prices will dampen oil demand and accelerate the global demand peak.

Emboldened by their current success in holding the price line at relatively excessive levels, the major producers of the Opec-plus alliance may double-down on production management in order to remain firmly in control of the market. Their aim is to extend the life of their fossil fuel reserves for as long as possible, while preparing themselves, technically and financially, for an unstoppable transition to a low-carbon economy.

They control the bulk of oil and gas exports and rely on the realignment of Saudi Arabian and Russian objectives. With its lowest production cost, Saudi Arabia appears determined to remain in control of the oil market, while Russia is strengthening its natural gas market power with its extensive and low-cost gas production.

The Opec-plus alliance now appears less concerned than before with the implications of its actions for temporary market disruptions or volatility in world economic expansion. The historic aspiration of safeguarding enough resources for future generations, once generally shared by the members, is becoming irrelevant and some of them are more preoccupied by the fear of ending up with stranded assets.

Exporters believe that this moment, while oil demand is still rising, may be their final opportunity to exercise economic and political leverage and gain a stronger voice in the climate debates, before global oil consumption begins its inevitable decline.

Delays at the Importer End

At the same time, oil-importing countries are realizing that their own energy transition will be a longer and more challenging process than previously assumed. Electric vehicle production has been delayed — albeit perhaps temporarily — by pandemic-induced supply-chain disruptions.

Biden’s legislation authorizing massive infrastructure investments aimed at meeting US climate change pledges is stalled in the US Senate. Public opposition to emissions-related taxes has been registered in France (the yellow-vest movement) and in Switzerland (popular rejection of the CO2 law in June 2021).

The EU now recognizes that it will need natural gas for an extended period to replace coal-fired power, and that its heavy dependence on Russian gas imports requires, for security reasons, investment in alternative gas infrastructure — despite the EU’s previously stated desire to eschew new investment in fossil fuels.

Exporters and importers face similar challenges. For both, the endgame of the oil era promises to be protracted and complex.

Eventually, fossil fuel exporting countries must diversify their economies away from dependence on natural-resource exports, but they realize that this will be a very long process. Simultaneously, fossil fuel importing countries are beginning to appreciate just how long it will take to diversify their energy consumption away from fossil fuels.

Benefits of Collaboration

Oil and gas importers and exporters could collaborate to facilitate their mutual transitions. Importers could recognize the exporters’ need for assistance in diversifying their economies by offering alternative investments, technology transfers, and human-resource development.

For example, the German foreign minister, prior to her January visit to Moscow, issued a statement outlining “opportunities for cooperation ... in science and culture, on trade and investment, on renewable energies and in the fight against the climate crisis, whose impact is increasingly being felt in Russia as much as elsewhere.”

The Russian high-level statement at the opening of COP26 expressed the same idea thus: “Climate change requires all countries to work together to share knowledge and tools. There should be no discrimination or restrictions preventing countries from accessing and using technologies and financial tools that will facilitate development of new sustainable infrastructure, capture and storage, decarbonization, improvement of energy efficiency, and support transition to clean energy.”

The outgoing Opec secretary-general, addressing COP26, expressed a similar view: “Developing countries have underscored the need for enhanced support, including financial resources, technological development and transfer, and capacity building, as well as a new collective goal for climate finance, to aid adaptation and back increased ambitions for climate mitigation actions.”

The director of the International Energy Agency, who only last May warned that achieving net-zero carbon emissions by 2050 implied sharply reducing global oil consumption to only 24 million barrels per day from today’s 100 million b/d, now urges Opec-plus to expand output. Just this past week, he stated: “It is important to discuss how this [energy] transition can be made in an orderly manner.”

Oil exporters should admit that high oil prices may work to their disadvantage in the long run, and offer instead to accelerate their own emissions reductions — especially methane emissions — in return for help with their energy transition. Oil exporters and importers could collaborate on a program to bring renewable power to the 770 million humans who still lack access to electricity.

Given willingness and trust, numerous forms of cooperation between exporters and importers could smooth the endgame of the oil era.

Nordine Ait-Laoussine is a former Algerian oil minister and an independent energy economist based in Switzerland. John Gault is an independent energy economist based in Switzerland.