Oil’s influence on global trade is shrinking. What does this mean for oil-exporting countries?
Europeans generally assume that the energy transition will be a huge problem for countries that export fossil fuels. They wonder how much longer these countries can remain stable, as if collapse is almost inevitable. The issue is actually much more complex. The situation of individual countries varies considerably. Saudi Arabia, for example, relies heavily on oil exports and has another 80 years of reserves. It therefore has a vested interest in staying in the market. It also has two powerful advantages: First, Saudi Arabia’s oil is less carbon-intensive than other types and is therefore in demand worldwide even as the energy transition progresses. Second, its production costs are low, which makes its oil relatively cheap. So even if demand for oil declines significantly, Saudi Arabia will still be well positioned, while relatively high-cost producers like Canada and Venezuela will gradually exit the market. Of course, Saudi Arabia will eventually feel the squeeze as well. But they’ll be the ones to turn out the lights.
What about Russia? News reports suggest that its government doesn’t seem to be joining the energy transition.
That’s right. But Russia’s potential for renewable energy is enormous. And there are also initiatives at the local level. But the transition isn’t popular among policymakers. On the contrary, Russia recently revised its coal mining targets upward. But there are parallel developments that could open up new avenues. For instance, Russia is engaging in incremental innovation to be able to tap new value chains. One example is blue hydrogen. But that’s a risky bet. I wouldn’t simply assume that the EU will be a big buyer of Russian blue hydrogen. On the other hand, Russia’s economy is much more diversified than Saudi Arabia’s. Its value creation isn’t exclusively in upstream oil and gas. So if demand for fossil fuels shrinks, Russia would, in principle, be in a position to shift its focus to other economic sectors. That, however, would require it to revamp its budget so that it becomes less dependent on fossil exports. For example, Russia could make strategic investments and create tax incentives to promote other industries. But that would take political will and a long-term perspective, characteristics Russia lacks – at least for now.
What’s Europe’s long-term perspective? How will the energy transition affect its foreign relations?
The EU imports roughly one-fifth of all oil, which makes it a very important player on the oil market. The EU’s actions have a global impact. If it imports less oil in the future and instead imports green hydrogen, for example, it would end up scaling back some of its current economic relationships and replacing them with others. The question is whether the new relationships will be with the same countries from which the EU has been buying coal and oil or whether a decarbonized future will result in a broader realignment of foreign policy. I think the latter is very likely. New energy sources are forcing Europe to think more in terms of infrastructure, such as integrated power grids. Compared with today, trade flows in the energy sector will become less global and more regional. Countries in North Africa will play a larger role, some more distant countries possibly a smaller role.
Sounds like a major upheaval.
It is. That’s why it’s incredibly important now to realize that decarbonizing Europe’s $15 trillion economy will have far-reaching foreign policy consequences. This awareness is still lacking.
What specific steps can the EU take to address these challenges?
It needs to better integrate its climate, trade, and foreign policy. And to use its development policy to help countries that will no longer be trading partners of a decarbonized EU to have a soft landing. The EU needs to help strengthen the political institutions in these regions and facilitate market-based investment in their industries. Because one thing is certain: if the EU doesn’t cushion the energy transition’s adverse implications in these countries, that will sooner or later come back to haunt it. Monoexporting countries will become unstable. In addition, over the next four years the EU must try to reach a shared, transatlantic understanding regarding decarbonization issues. Because it doesn’t take a Trump presidency for these issues to be a source of friction. Happily, the EU and the U.S again share the goal of tackling climate change. Nevertheless, their overall interests as well as their approaches to carbon regulation and green technologies differ. The EU has recently discussed border adjustment mechanisms for carbon-intensive products. The U.S. might interpret them as protectionist, resulting in trade disagreements or even trade wars. The EU would then not only lose valuable economies of scale. It would also be distracted from the economic and climate policy impacts that its actions have in other parts of the world.
How can the EU and the U.S. work together?
They can at least coordinate their policy mechanisms and approaches. If the EU develops mechanisms to propel decarbonization, it needs to swiftly coordinate them with its major trading partners. Otherwise, the mechanisms will lead to lawsuits and restrictions. Which is the last thing the EU wants.