The Eclipse

What Future for Fossil Fuel Producers in a Net-Zero World?

Fossil fuel energy has been the source of much wealth, power, and the bedrock of the global economy for over a century. Countries like Saudi Arabia and Norway have grown impossibly rich off the proceeds of their vast oil and gas reserves. But now fossil fuel producers face a new world where coal and oil is predicted to peak in demand and then fall rapidly.

New clean energy financing has now overtaken fossil fuels. Thanks to a trend of falling renewable energy costs and improving technological efficiency, plus a growing public clamour for climate action and government policies to encourage clean energy means that fossil fuels now face an uncertain future.

Oil Dependence

As long-term demand for fossil fuels falls, countries dependent on the revenues could face major disruption. Around a decade ago the price of oil fell to a level where Venezuela’s oil became uneconomic, and its economy cratered in spectacular fashion. Millions of Venezuelans migrated abroad to escape the chaos of (some estimates say up to 7 million), hyper-inflation, food shortages and widespread unemployment.

Since then, oil prices have risen, and the Venezuelan economy has made a partial recovery. But the scars remain and with it the risk that oil prices will collapse again despite Venezuela having the world’s biggest proven oil resources.

Fossil fuels supply 80 percent of world energy needs, but once it becomes clear they will be replaced by clean energy, a spiral of decline will hit. Countries like South Sudan, Nigeria and Libya that lack the capacity to change will face financial crises as they lose their main source of income.

Saudi Arabia

In contrast to Venezuela, Saudi Arabia has the world’s most accessible oil reserves, easy to reach, economic to produce. The Saudis hope to be the last man standing in world oil production. Able to produce at cheap prices, it will happily watch other more expensive producers like go out of business while it keeps pumping.

In a further twist, Saudi oil is less carbon intensive than other producers like Venezuela and Canada those product is extremely dirty and polluting to extract. This makes its oil more attractive in a world trying to go green.

Riyadh will want to keep oil flowing for as long as possible, but ironically the Saudis are among the best placed to shift to clean energy. It has plenty of money to spend on technology, millions of hectares of desert with ample sunshine and a long coastline ideal for wind energy.

The de facto leader of Saudi Arabia “MBS” has promised to build a huge net-zero sustainable city in the desert called Neom. Many have already dismissed this as a white elephant, for others it is the harbinger of a greener future. Saudia Arabia appears to be hedging its bets, taking steps to build clean energy capacity, but carry on pumping oil.

South Sudan

In contrast OPEC’s smallest producer South Sudan is one of the world’s poorest countries which has been rocked by conflict since its inception ten years ago. Its modest amounts of oil are a lifeline to a landlocked country with few prospects beyond its natural resources.

For a country locked in a battle to survive with little capacity or money to transition to renewable energy the threat of losing oil revenues (95 percent of government revenues) is extremely serious. South Sudan will be largely reliant on overseas donors from the West or perhaps China to help it shift to clean energy.

Can Iran Transition?

Countries with more resources than South Sudan will also struggle to kick the oil habit and shift to clean energy. Iran was cut adrift from the much of the global economy thanks to sanctions, plus owning some of the biggest reserves of oil and gas (a major disincentive) means it has fallen behind in terms of renewable technology.

Iran faces an extremely high transition risk. Teheran is likely to try and retain its oil and gas export markets long after other countries have shifted towards renewables. This means when it is finally forced to transition toward renewables it will find it extremely painful despite having considerable resources and state capacity at its disposal.

The revolution has only just started

But the revolution must be accelerated. Fossil fuels still represent 80 percent of global energy use. China and the West have the resources, technology and increasingly the momentum to decarbonise. Developing countries in contrast need more help to pursue this path.

The world is in a race against time to reduce carbon emissions before the impacts of climate change become truly disastrous. If developing countries do not receive assistance to shift to clean energy the risk is that they will stick with oil and gas, adding to carbon emissions and ruining their long-term economic prospects.

Rear-guard Actions

Another threat is that the oil producers will attempt further rear-guard actions. The next COP meeting is hosted in the UAE and there are fears the event will be derailed by fossil fuel interests. But oil producers are in a bind. Increasing prices makes them more money, but it makes renewable energy and the security that brings more attractive. Lower oil and gas prices make it easier for countries to delay transition, but it means lower revenues for producers.

However, a long running misinformation campaign backed by fossil fuel interests will continue to cast doubt on the energy transition continues across the world. Outright climate denial is rare, instead the cost of transition is attacked.

The golden age of fossil fuels is truly in the past, even the most dogged defenders of the system can see the writing on the wall. And while they may seek to delay progress, countries dependent on fossil fuels should be planning a new life in a world headed towards net-zero.