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One of the defining features of the 2008-2015 crisis was the combination of a deep recession with exceptionally high oil prices. At some point a barrel of oil cost $160 and prices hovered around $100/barrel until 2015. The EU imports 96% of its crude oil and there is a direct correlation between the EU’s economic performance and the amount of money we spend on oil. The difference between an oil price of $70 or $20 is around €100 billion in additional disposable annual income available for consumers to spend in shops and restaurants once they reopen.
So if there were an economic silver lining to be seen from the dark clouds of human suffering and economic gloom of recent weeks, it would be oil prices dropping to $20/barrel. That is of course not how petro-dictators in Saudi Arabia and Russia see it. They rely on the revenues from expensive oil to suppress dissent at home and sow division and religious hatred abroad. The US has a more mixed interest with American motorists preferring cheap gas but US shale oil producers needing a price above $30-40 a barrel to stay afloat.
So, as oil prices sagged Donald Trump and oil barons across the world got very nervous. Clearly something had to be done. It took a bit of haggling and coercing of some of the less willing oil barons. (Saudi Arabia and Russia quietly rejoice at the prospect of the US oil industry collapsing.) But after a fair bit of theatrics OPEC, Russia and the US jointly agreed what was dubbed the largest ever oil supply agreement in history. The idea behind this G20-backed deal is to force up prices through a cut in production. The downside for oil producers is that they get to sell less product now. But assuming that demand for oil continues to grow, petrostates can always sell their reserves later. After the oil deal, oil prices rose from $24 on 1 April to $34 two days later. That’s another €100 million added to European fuel bills in just two days.
There are three very interesting lessons to be drawn from this ‘historic’ oil deal.
First, Europe remains what it has been since 1973: a pawn in the oil barons’ great game. We don’t really have oil and have nowhere else to turn. Europeans have to pay whatever sellers demand.
Second, whilst the oil deal led to a price-rally initially, oil prices dropped again just a few days later and US oil prices went negative although futures remain around $20/barrel. Investors are worried about the severity of the global downturn and the pace of the recovery, which could depress oil demand for months, or even years, to come.
A third factor is that whilst this slowdown happens alternatives gain market share. Electric vehicle (EV) sales in Germany and France reached 7-9% in the first two months of 2020 and that’s only the beginning.
The combination of a slowdown in the global economy and the rapid proliferation of electric mobility may bring forward peak oil demand – some argue it may have already happened. That could depress oil prices for years to come. But why, readers will wonder, shouldn’t T&E be in favour of high oil prices?
The only benefit of high oil prices – fewer kilometers driven – is limited whilst the downsides are huge. Expensive oil increases the quest for unconventional and dirtier sources such as tar sands and shale oil. It makes fossil fuel companies filthy rich and leads to a transfer of wealth from Europe to the rest of the world. Now this doesn’t mean we want prices at the pump to go through the floor. Low oil prices are an excellent opportunity to increase fuel taxes, which have none of the downsides of expensive oil but all the benefits. In conclusion, we don’t need expensive oil now and in the long run we want it to become worthless.
The Paris climate agreement means this would happen sometime around the middle of the 21st century. But the petroleum industry’s house of cards could fall apart much sooner.
The main asset of an oil company is its reserves. For example, ExxonMobil had 24.3 billion in oil-equivalent barrels of oil and gas at year-end 2018 (of which 64% was oil). That’s enough to fuel Europe’s vehicle fleet for five years. Replenishing these reserves is one of the main tasks of an oil company. But the whole idea of having massive reserves is that oil demand is limitless. That’s why oil companies (and the International Energy Agency) keep putting out scenarios that see global oil demand rise for decades to come.
But once peak oil demand happens and the decline sets in, production cuts between oil barons become much tougher. Indeed, if the market starts to shrink, petrostates can’t bank on their reserves still being worth the same 10 years down the line. Peak demand will be the undoing of OPEC+ with all oil states wanting to sell as much oil as soon as possible, depressing oil prices further and rebalancing the world economy in favour of oil importers (and, it should be added, the people living in dictatorial petrostates suffering grievously from what is known as the resource curse).
This is a strategic objective Europe should be pursuing with all its might. So, the EU needs to do its homework and press on with the European Green Deal. But it should do more. China and India, those two other big oil importers, will be allies in this. Ursula von der Leyen should send her energy commissioner, Kadri Simson, to Delhi and Beijing to create an anti-OPEC alliance. The main thrust of that alliance would be to aggressively and jointly promote transport electrification. The quicker we move on electric, and shift to ubiquitous wind and solar power, the quicker we break the Trump-OPEC+ cartel. The quicker we liberate ourselves from the oil barons, the more prosperous and greener we will be.