Najib Saab
Secretary-General of the Arab Forum for Environment and Development (AFED) and editor-in-chief of Environment and Development magazine
TT

Which Price Levels Good for Climate and OPEC?

Despite the frenzied talk about the huge rise in oil prices, what the market is witnessing is not a novelty, as prices have reached higher levels in the past, based on political, military and economic developments. If we compare the purchasing power of Dollars a barrel of oil can fetch today with what it could twenty years ago, we will find that it has decreased. The trajectory of fossil fuel prices has often been slower than the upward trajectory of inflation rates. According to the sovereign right of states to exercise control over their natural resources, within the scope of compliance with commercial contracts and international agreements, no party has the right to impose restrictions on production and export levels. This argument is meant to help answer the question of whether the large fluctuation of prices is in the interest of oil-producing countries, and how it relates to environmental goals and commitments to reduce carbon emissions.

At the time when Arab oil producers imposed an export ban in 1973, the price of a barrel was less than $3; within a year it rose to about $12. This price correction was necessary, because the price of oil until that time was very low compared to other vital commodities. Since that time, oil price has begun to be linked more and more to real market prices as a commodity governed by supply, demand and reserves, with the Organization of the Petroleum Exporting Countries (OPEC) gaining greater ability to defend the rights of its members. During that period, malicious comments spread in some key importing countries, probably the nastiest of which came from a US politician who said “God put oil in the wrong places.” This represents the highest level of racism and arrogance, suggesting that developing countries do not have the right to freely utilize their resources for the benefit of their people and obtain their full rights of marketing them.

Back in 1973, climate change was not a major issue yet. Therefore, talking about renewable energy at the time was not in the context of reducing carbon emissions, but rather in the framework of harnessing energy from the unlimited resources of the sun and wind, instead of rapidly depleting limited and non-renewable oil reserves. Actual interest in renewable energy free of carbon emissions began in the mid-1990s, after studies proved that human activities were the main cause of climate change, especially carbon emissions from burning fossil fuels. With each new commitment by climate summits to further reduce emissions, efforts were increased and budgets multiplied to introduce forms of renewable energy as clean alternatives, in addition to adopting efficiency measures and developing practical technologies to capture carbon from burning fossil fuels, for harmless reuse and safe storage. Whereas investments in renewable energy declined in the past with each wave of decline in oil prices, as they became less attractive investments, the last ten years have witnessed steady expansion of solar and wind projects at a stable pace, even during the significant decline in oil prices, with the price of a barrel falling to below $30 for a long period between 2015 and 2020. In recent years, OPEC countries have tried to maintain stable supplies and fair prices, although some voices in the United States have recently returned to accusing the Organization of monopolistic practices.

It is natural that we defend the right of oil-producing countries to decide on supply levels, in the sense of it being an indisputable sovereign right and just means to fetch a fair compensation from selling their natural resources and ensure sustainability. However, the world today is experiencing unprecedented developments, which demand new approaches to confront. When the price of a barrel of oil was about $10 in 1975, the cost of solar panels to produce one watt of electricity exceeded $100, while today it dropped to less than a dollar. In other words, while the price of oil increased more than ten times, the cost of building solar power plants has decreased by 100 times. Today, solar and wind plants offer the cheapest electricity prices to consumers in most regions of the world, after the significant rise in oil and gas prices. As for the reservations that prevailed in the past regarding the inability of sun and wind to store energy, technological advances have overridden most of them, through high-efficiency batteries and the development of efficient and cheap methods of producing hydrogen as a carrier and safe storage of energy, relying on renewable electricity during peak periods and water, even from the sea.

Although the basic facts have not changed, the economic and geopolitical repercussions of coronavirus and the invasion of Ukraine imposed a new pace, reinforced by the significant rise in oil and gas prices, in parallel to a global economic decline and unprecedented rates of inflation. The shortage in supplies and the partial embargo imposed by the EU countries on Russian gas and oil are prompting a rapid search for alternative solutions, foremost among which is a return to coal and nuclear energy, which certainly contradicts climate commitments to reduce emissions, at least in the short term. However, this was accompanied by a significant acceleration in transition programs to renewable energy sources in the medium term, a move which may expose the smooth transition in oil countries to uncalculated hurdles. Perhaps the plans recently announced by the EU to reduce dependence on gas and oil supplies from Russia or any other external source is the most prominent example of this. In addition to building new pipelines and liquefied gas processing plants to import fossil fuels from other countries, the plan included new goals to improve efficiency and accelerate the transition to renewable energies at a pace no one had previously imagined. These include reducing Europe’s energy consumption in general by 13 percent and raising the share of renewable energy to 45 percent by 2030, up to eliminating the use of fossil fuels by 2045. Although the plan might look over-ambitious, just circulating it sends a clear signal of radical change.

It is in the interest of producers and consumers alike to stabilize supplies and maintain moderate levels of oil and gas prices. Failure to meet demand pushes importing countries to use polluting and dangerous alternatives in the short term, and hasten to dispense with fossil fuels by quickly switching to renewable energies in the medium term. While the first phase entails significant damage to the environment, the second phase leads to a sudden and unregulated shift away from traditional sources, impeding the smooth deployment of alternatives and harming producers and consumers alike.

Arab oil and gas producing countries can maintain their leadership position in the energy markets and protect their interests in the long run, by working as much as possible to meet the needs of the markets, while ensuring the stability of supplies and thus securing moderate prices. This cements their position as a major player, extending the period they can harness optimal benefits from oil and gas income, pending the development of efficient and economical carbon capture and reuse and safe storage technologies.

Najib Saab is Secretary General of the Arab Forum for Environment and Development- AFED (www.afedonline.org) and Editor-in-Chief of Environment & Development magazine (www.afedmag.com).