Climate Change: Consequences for Oil Policies

Dr. Tilak K. Doshi, Chief Economist and Principal Fellow, Energy Studies Institute,NationalUniversity of Singapore,Republic of Singapore

The IPCC estimates that extremely aggressive cuts in carbon emissions are required in order to minimize the impact on the environment. Countries and regions can be ranked according to the carbon intensity of their economies as well as their ability to pay for future cuts. China and the former Soviet Union rank highly, as does the UAE and the rest of the Middle East, while service economies such as Singapore and Hong Kong are low.

After the Copenhagen Accord, key developing nations agreed to economy-wide targets for the first time. However, recent developments like the current recession and the Republican electoral victory in the US mid-term elections mean further progress will be more difficult to achieve.

Although renewable energy sources are projected to grow rapidly (by more than 7%) over the next few decades, in absolute terms they will remain marginal, and fossil fuels will remain the most important energy sources. The majority of current emissions come from coal. OPEC countries participate in climate change negotiations individually, rather than as a bloc, but they generally follow Saudi Arabia’s lead.

Carbon taxes increase the rents importing governments enjoy in oil markets. Oil is already disadvantaged compared to other fuels owing to the policies of developed countries. If oil subsidies in developing countries were removed, it would significantly reduce future demand. If moderate climate change mitigation policies are followed, the IEA estimates that demand would fall by 2035 to 99 mbpd compared with the base case of 107 mpbd, and the price would be $113 per barrel rather than $135 per barrel.

Climate change considerations have increased uncertainty. The industry has begun investing in renewable energy, though without much success. As a result, natural gas is seen as the key transition fuel until renewable costs are competitive.

If carbon emissions standards are imposed differently in different places, the refining industry will move from Houston, Amsterdam/Rotterdam and Singapore to places with more lenient emissions standards. The bunkering industry – in which Fujairah is a key global player – could also be affected by such distortions.

International agreements reducing emissions are unlikely, but national and regional policy initiatives are likely. Issues of protectionism in OECD countries and “leakage” of activity between different emissions regimes will be of concern to the oil industry. For oil exporters, it is important that oil is on a level playing field with other fossil fuels.